10-Q

13

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2015

or

☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                 to                

Commission File Number:    001-09463

RLI Corp.

(Exact name of registrant as specified in its charter)

ILLINOIS	37-0889946
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)
9025 North Lindbergh Drive, Peoria, IL	61615
(Address of principal executive offices)	(Zip Code)

(309) 692-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.   Yes  ☒    No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  ☒    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☐
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐   No ☒

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of July 13, 2015, the number of shares outstanding of the registrant’s Common Stock was 43,232,625.

Table of Contents

			Page
Part I - Financial Information			3
	Item 1.	Financial Statements	3
		Condensed Consolidated Statements of Earnings and Comprehensive Earnings For the Three-Month Periods Ended June 30, 2015 and 2014 (unaudited)	3
		Condensed Consolidated Statements of Earnings and Comprehensive Earnings For the Six-Month Periods Ended June 30, 2015 and 2014 (unaudited)	4
		Condensed Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014	5
		Condensed Consolidated Statements of Cash Flows For the Six-Month Periods Ended June 30, 2015 and 2014 (unaudited)	6
		Notes to unaudited condensed consolidated interim financial statements	7
	Item 2.	Management’s discussion and analysis of financial condition and results of operations	20
	Item 3.	Quantitative and qualitative disclosures about market risk	34
	Item 4.	Controls and procedures	34
Part II - Other Information			34
	Item 1.	Legal proceedings	34
	Item 1a.	Risk factors	34
	Item 2.	Unregistered sales of equity securities and use of proceeds	34
	Item 3.	Defaults upon senior securities	34
	Item 4.	Mine safety disclosures	34
	Item 5.	Other information	34
	Item 6.	Exhibits	35
Signatures			36

2

PARTI - FINANCIAL INFORMATION

Item 1. Financial Statements

RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Earnings and Comprehensive Earnings

(Unaudited)

	For the Three-Month Periods
	Ended June 30,
(in thousands, except per share data)	2015		2014
Net premiums earned	$	172,339	$	168,604
Net investment income		13,431		13,982
Net realized investment gains		4,802		10,431
Consolidated revenue	$	190,572	$	193,017
Losses and settlement expenses		64,549		73,345
Policy acquisition costs		59,487		55,156
Insurance operating expenses		13,467		13,534
Interest expense on debt		1,857		1,874
General corporate expenses		2,748		2,549
Total expenses	$	142,108	$	146,458
Equity in earnings of unconsolidated investees		6,186		5,864
Earnings before income taxes	$	54,650	$	52,423
Income tax expense		17,465		16,698
Net earnings	$	37,185	$	35,725
Other comprehensive earnings (loss), net of tax		(24,932)		19,934
Comprehensive earnings	$	12,253	$	55,659
Earnings per share:
Basic:
Basic net earnings per share	$	0.86	$	0.83
Basic comprehensive earnings per share	$	0.28	$	1.29
Diluted:
Diluted net earnings per share	$	0.84	$	0.82
Diluted comprehensive earnings per share	$	0.28	$	1.27
Weighted average number of common shares outstanding
Basic		43,210		43,001
Diluted		44,019		43,688
Cash dividends paid per common share	$	0.19	$	0.18

See accompanying notesto the unaudited condensed consolidated interim financial statements.

3

RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Earnings and Comprehensive Earnings

(Unaudited)

	For the Six-Month Periods
	Ended June 30,
(in thousands, except per share data)	2015		2014
Net premiums earned	$	341,342	$	329,736
Net investment income		26,926		27,564
Net realized investment gains		18,088		16,932
Consolidated revenue	$	386,356	$	374,232
Losses and settlement expenses		145,410		144,361
Policy acquisition costs		118,460		110,207
Insurance operating expenses		24,998		26,067
Interest expense on debt		3,713		3,725
General corporate expenses		4,992		4,747
Total expenses	$	297,573	$	289,107
Equity in earnings of unconsolidated investees		10,380		9,289
Earnings before income taxes	$	99,163	$	94,414
Income tax expense		31,380		29,720
Net earnings	$	67,783	$	64,694
Other comprehensive earnings (loss), net of tax		(32,527)		37,671
Comprehensive earnings	$	35,256	$	102,365
Earnings per share:
Basic:
Basic net earnings per share	$	1.57	$	1.50
Basic comprehensive earnings per share	$	0.82	$	2.38
Diluted:
Diluted net earnings per share	$	1.54	$	1.48
Diluted comprehensive earnings per share	$	0.80	$	2.34
Weighted average number of common shares outstanding
Basic		43,176		42,993
Diluted		44,008		43,669
Cash dividends paid per common share	$	0.37	$	0.35

See accompanying notesto the unaudited condensed consolidated interim financial statements.

4

RLI Corp. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

	June 30,		December 31,
(in thousands, except share data)	2015		2014
ASSETS
Investments
Fixed income
Available-for-sale, at fair value	$	1,537,365	$	1,495,087
Equity securities, at fair value		391,152		410,642
Short-term investments, at cost		10,169		16,339
Other invested assets		11,069		11,597
Cash		27,087		30,620
Total investments and cash	$	1,976,842	$	1,964,285
Accrued investment income		15,052		14,629
Premiums and reinsurance balances receivable		174,584		154,573
Ceded unearned premium		52,603		53,961
Reinsurance balances recoverable on unpaid losses		328,030		335,106
Deferred policy acquisition costs		71,575		65,123
Property and equipment		43,407		42,549
Investment in unconsolidated investees		71,179		60,046
Goodwill and intangibles		72,249		72,695
Other assets		9,664		12,575
TOTAL ASSETS	$	2,815,185	$	2,775,542
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Unpaid losses and settlement expenses	$	1,142,596	$	1,121,040
Unearned premiums		430,632		401,412
Reinsurance balances payable		36,915		38,013
Funds held		54,055		51,481
Income taxes-deferred		68,462		82,285
Bonds payable, long-term debt		149,647		149,625
Accrued expenses		40,303		63,148
Other liabilities		24,677		23,476
TOTAL LIABILITIES	$	1,947,287	$	1,930,480
Shareholders’ Equity
Common stock ($1 par value, 100,000,000 shares authorized)
(66,162,839 shares issued, 43,232,625 shares outstanding at 6/30/15)
(66,032,929 shares issued, 43,102,715 shares outstanding at 12/31/14)	$	66,163	$	66,033
Paid-in capital		217,165		213,737
Accumulated other comprehensive earnings		138,856		171,383
Retained earnings		838,713		786,908
Deferred compensation		14,042		13,769
Less: Treasury shares at cost
(22,930,214 shares at 6/30/15 and 12/31/14)		(407,041)		(406,768)
TOTAL SHAREHOLDERS’ EQUITY	$	867,898	$	845,062
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,815,185	$	2,775,542

See accompanying notes to the unaudited condensed consolidated interim financial statements.

5

RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	For the Six-Month Periods
	Ended June 30,
(in thousands)	2015		2014
Net cash provided by operating activities	$	71,121	$	38,528
Cash Flows from Investing Activities
Investments purchased	$	(393,382)	$	(311,402)
Investments sold		250,602		217,403
Investments called or matured		81,680		49,932
Net change in short-term investments		3,866		15,462
Net property and equipment purchased		(3,289)		(4,921)
Investment in equity method investee		(1,711)		(5,301)
Net cash used in investing activities	$	(62,234)	$	(38,827)
Cash Flows from Financing Activities
Cash dividends paid	$	(15,978)	$	(15,046)
Stock plan share issuance		1,779		2,760
Excess tax benefit from exercise of stock options		1,779		350
Net cash used in financing activities	$	(12,420)	$	(11,936)
Net decrease in cash	$	(3,533)	$	(12,235)
Cash at the beginning of the period	$	30,620	$	39,469
Cash at June 30	$	27,087	$	27,234

See accompanying notes to the unaudited condensed consolidated interim financial statements.

6

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A.  BASIS OF PRESENTATION

The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. As such, these unaudited condensed consolidated interim financial statements should be read in conjunction with our 2014 Annual Report on Form 10-K. Management believes that the disclosures are adequate to make the information presented not misleading, and all normal and recurring adjustments necessary to present fairly the financial position at June 30, 2015 and the results of operations of RLI Corp. and subsidiaries for all periods presented have been made. The results of operations for any interim period are not necessarily indicative of the operating results for a full year.

The preparation of the unaudited condensed consolidated interim financial statements requires management to make estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated interim financial statements and the reported amounts of revenue and expenses during the period. These estimates are inherently subject to change and actual results could differ significantly from these estimates.

B.  ADOPTED ACCOUNTING STANDARDS

No new accounting standards have been adopted as no issued updates would impact our financial statements.

C.  PROSPECTIVE ACCOUNTING STANDARDS

ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs

This ASU was issued to simplify the presentation of debt issuance costs by requiring them to be presented in the balance sheet as a direct deduction from the carrying amount of the related recognized debt liability, consistent with debt discounts. This ASU is effective for annual and interim reporting periods beginning after December 15, 2015. Early adoption is permitted. We have not early-adopted this ASU and do not believe adoption will have a material effect on our financial statements.

ASU 2015-09, Financial Services-Insurance (Topic 944): Disclosures about Short-Duration Contracts

This ASU was issued to enhance disclosures about an entity’s insurance liabilities, including the nature, amount, timing and uncertainty of cash flows related to those liabilities. The new guidance requires the disclosure of the following information related to unpaid claims and claim adjustment expenses:

a. Net incurred and paid claims development information by accident year for the number of years for which claims incurred typically remain outstanding, but need not exceed 10 years;

b. A reconciliation of incurred and paid claims development information to the aggregate carrying amount of the liability for unpaid claims and claim adjustment expenses, with separate disclosure of reinsurance recoverable on unpaid claims for each period presented in the statement of financial position;

c. For each accident year presented, the total of incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses;

d. For each accident year presented, quantitative information about claim frequency accompanied by a qualitative description of methodologies used for determining claim frequency information; and

e. For all claims, the average annual percentage payout of incurred claims by age.

This ASU is effective for annual reporting periods beginning after December 15, 2015 and for interim periods beginning after December 15, 2016. Early adoption is permitted. We have not early-adopted this ASU and while disclosures will be increased, we do not believe adoption will have a material effect on our financial statements.

7

D.  INTANGIBLE ASSETS

In accordance with GAAP guidelines, the amortization of goodwill and indefinite-lived intangible assets is not permitted. Goodwill and indefinite-lived intangible assets remain on the balance sheet and are tested for impairment on an annual basis, or earlier if there is reason to suspect that their values may have been diminished or impaired. Goodwill and intangible assets totaled $72.2 million at June 30, 2015.

Goodwill and intangible assets resulting from acquisitions completed prior to 2011 totaled $26.2 million and is attributable to our surety segment. Of this $26.2 million, $25.6 million relates to goodwill and $0.6 million relates to an indefinite-lived intangible asset. Goodwill and intangible assets resulting from the Contractors Bonding and Insurance Company (CBIC) acquisition in April 2011 totaled $30.3 million. The CBIC-related assets include goodwill attributable to our casualty and surety segments of $5.3 million and $15.1 million, respectively, and an indefinite-lived intangible asset in the amount of $7.5 million, which relates to state insurance licenses. Annual impairment testing was performed on each of these goodwill and indefinite-lived intangible assets during the second quarter of 2015. Based upon these reviews, none of the assets were impaired. In addition, as of June 30, 2015, there were no triggering events that occurred that would suggest further review was necessary. Definite-lived intangible assets related to the CBIC acquisition totaled $2.4 million, net of amortization, as of June 30, 2015.

The remaining $15.7 million of goodwill and intangibles relates to our purchase of Rockbridge Underwriting Agency (Rockbridge) in November 2012. Of this amount, $12.4 million is recorded as goodwill attributable to our casualty segment. The remaining $3.3 million relates to definite-lived intangible assets, net of amortization, as of June 30, 2015. Impairment testing is performed on this goodwill asset in the fourth quarter of each year. There were no triggering events that occurred during the first half of 2015 that would suggest further review was necessary.

The aforementioned definite-lived intangible assets are amortized against future operating results based on their estimated useful lives. Amortization of intangible assets resulting from the acquisitions of CBIC and Rockbridge was $0.2 million for the second quarter of 2015 and $0.4 million for the six-month period ended June 30, 2015.

E.  EARNINGS PER SHARE

Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock or common stock equivalents were exercised or converted into common stock. When inclusion of common stock equivalents increases the earnings per share or reduces the loss per share, the effect on earnings is anti-dilutive. Under these circumstances, the diluted net earnings or net loss per share is computed excluding the common stock equivalents.

8

The following represents a reconciliation of the numerator and denominator of the basic and diluted EPS computations contained in the unaudited condensed consolidated interim financial statements.

	For the Three-Month Period					For the Three-Month Period
	Ended June 30,  2015					Ended June 30,  2014
	Income		Shares	Per Share		Income		Shares	Per Share
(in thousands, except per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Basic EPS
Income available to common shareholders	$	37,185	43,210	$	0.86	$	35,725	43,001	$	0.83
Effect of Dilutive Securities
Stock options		-	809				-	687
Diluted EPS
Income available to common shareholders	$	37,185	44,019	$	0.84	$	35,725	43,688	$	0.82
	For the Six-Month Period					For the Six-Month Period
	Ended June 30,  2015					Ended June 30,  2014
	Income		Shares	Per Share		Income		Shares	Per Share
(in thousands, except per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Basic EPS
Income available to common shareholders	$	67,783	43,176	$	1.57	$	64,694	42,993	$	1.50
Effect of Dilutive Securities
Stock options		-	832				-	676
Diluted EPS
Income available to common shareholders	$	67,783	44,008	$	1.54	$	64,694	43,669	$	1.48

F.  COMPREHENSIVE EARNINGS

Our comprehensive earnings include net earnings plus unrealized gains/losses on our available-for-sale investment securities, net of tax. In reporting comprehensive earnings on a net basis in the statement of earnings, we used the federal statutory tax rate of 35 percent.

Unrealized losses for the first six months of 2015 were $32.5 million compared to unrealized gains of $37.7 million during the same period last year. Fixed income securities declined in market value during 2015 as interest rates rose and our conservative positioning in the equity portfolio underperformed the market over the same period. In 2014, both fixed income and equity securities experienced positive price movements.

The following table illustrates the changes in the balance of each component of accumulated other comprehensive earnings for each period presented in the unaudited condensed consolidated interim financial statements.

(in thousands)	For the Three-Month Periods				For the Six-Month Periods
	Ended June 30,				Ended June 30,
Unrealized Gains/Losses on Available-for-Sale Securities	2015		2014		2015		2014
Beginning balance	$	163,788	$	153,764	$	171,383	$	136,027
Other comprehensive earnings before reclassifications		(21,760)		26,714		(20,764)		48,674
Amounts reclassified from accumulated other comprehensive earnings		(3,172)		(6,780)		(11,763)		(11,003)
Net current-period other comprehensive earnings (loss)	$	(24,932)	$	19,934	$	(32,527)	$	37,671
Ending balance	$	138,856	$	173,698	$	138,856	$	173,698

9

The sale or other-than-temporary impairment of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive earnings to current period net earnings. The effects of reclassifications out of accumulated other comprehensive earnings by the respective line items of net earnings are presented in the following table.

	Amount Reclassified from Accumulated Other
(in thousands)	Comprehensive Earnings
	For the Three-Month				For the Six-Month
Component of Accumulated	Periods Ended June 30,				Periods Ended June 30,				Affected line item in the
Other Comprehensive Earnings	2015		2014		2015		2014		Statement of Earnings
Unrealized gains and losses on available-for-sale securities	$	4,880	$	10,431	$	18,097	$	16,928	Net realized investment gains
		-		-		-		-	Other-than-temporary impairment (OTTI) losses on investments
	$	4,880	$	10,431	$	18,097	$	16,928	Earnings before income taxes
		(1,708)		(3,651)		(6,334)		(5,925)	Income tax expense
	$	3,172	$	6,780	$	11,763	$	11,003	Net earnings

2.INVESTMENTS

Our investments include fixed income debt securities and common stock equity securities. As disclosed in our 2014 Annual Report on Form 10-K, we present all of our investments as available-for-sale, which are carried at fair value. During the fourth quarter of 2014, we sold our last remaining fixed income security that was classified as held-to-maturity. When available, we obtain quoted market prices to determine fair value for our investments. If a quoted market price is not available, fair value is estimated using a secondary pricing source or using quoted market prices of similar securities. We have no investment securities for which fair value is determined using Level 3 inputs as defined in note 3 to the unaudited condensed consolidated interim financial statements, “Fair Value Measurements.”

Available-for-Sale Securities

The amortized cost and fair value of available-for-sale securities at June 30, 2015 and December 31, 2014 were as follows:

Available-for-sale
(in thousands)
	6/30/2015
	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Asset Class	Cost		Gains		Losses		Value
U.S. government	$	30,281	$	129	$	(10)	$	30,400
U.S. agency		13,499		229		(84)		13,644
Non-U.S. govt. & agency		1,893		-		(53)		1,840
Agency MBS		232,883		7,680		(1,383)		239,180
ABS/CMBS*		87,214		1,429		(344)		88,299
Corporate		595,886		14,694		(8,620)		601,960
Municipal		553,346		11,746		(3,050)		562,042
Total Fixed Income	$	1,515,002	$	35,907	$	(13,544)	$	1,537,365
Equity	$	198,607	$	193,648	$	(1,103)	$	391,152

*Non-agency asset-backed and commercial mortgage-backed

10

Available-for-sale
(in thousands)
	12/31/2014
	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Asset Class	Cost		Gains		Losses		Value
U.S. government	$	33,668	$	131	$	(11)	$	33,788
U.S. agency		6,385		362		-		6,747
Non-U.S. govt. & agency		9,862		803		-		10,665
Agency MBS		256,443		9,401		(1,376)		264,468
ABS/CMBS*		133,894		1,821		(411)		135,304
Corporate		543,183		23,697		(4,190)		562,690
Municipal		464,769		16,789		(133)		481,425
Total Fixed Income	$	1,448,204	$	53,004	$	(6,121)	$	1,495,087
Equity	$	193,535	$	218,105	$	(998)	$	410,642

*Non-agency asset-backed and commercial mortgage-backed

The following table presents the amortized cost and fair value of available-for-sale debt securities by contractual maturity dates as of June 30, 2015:

	6/30/2015
Available-for-sale	Amortized		Fair
(in thousands)	Cost		Value
Due in one year or less	$	9,309	$	9,391
Due after one year through five years		259,490		265,403
Due after five years through 10 years		599,500		608,967
Due after 10 years		326,606		326,125
Mtge/ABS/CMBS*		320,097		327,479
Total available-for-sale	$	1,515,002	$	1,537,365

*Mortgage-backed, asset-backed and commercial mortgage-backed

Unrealized Losses

We conduct and document periodic reviews of all securities with unrealized losses to evaluate whether the impairment is other-than-temporary. The following tables are used as part of our impairment analysis and illustrate the total value of securities that were in an unrealized loss position as of June 30, 2015 and December 31, 2014. The tables segregate the securities based on type, noting the fair value, cost (or amortized cost) and unrealized loss on each category of investment as well as in total. The tables further classify the securities based on the length of time they have been in an unrealized loss position. As of June 30, 2015 unrealized losses, as shown in the following tables, were 0.7 percent of total invested assets. Unrealized losses increased in 2015, as interest rates increased during the first half of the year.

11

	June 30,  2015						December 31,  2014
(in thousands)	< 12 Mos.		12 Mos. &  Greater		Total		< 12 Mos.		12 Mos. &  Greater		Total
U.S. Government
Fair value	$	5,307	$	—	$	5,307	$	4,416	$	—	$	4,416
Cost or amortized cost		5,317		—		5,317		4,427		—		4,427
Unrealized Loss	$	(10)	$	—	$	(10)	$	(11)	$	—	$	(11)
U.S. Agency
Fair value	$	7,026	$	—	$	7,026	$	—	$	—	$	—
Cost or amortized cost		7,110		—		7,110		—		—		—
Unrealized Loss	$	(84)	$	—	$	(84)	$	—	$	—	$	—
Non-U.S. government
Fair value	$	1,840	$	—	$	1,840	$	—	$	—	$	—
Cost or amortized cost		1,893		—		1,893		—		—		—
Unrealized Loss	$	(53)	$	—	$	(53)	$	—	$	—	$	—
Agency MBS
Fair value	$	60,153	$	20,107	$	80,260	$	12,840	$	61,534	$	74,374
Cost or amortized cost		60,974		20,669		81,643		12,947		62,803		75,750
Unrealized Loss	$	(821)	$	(562)	$	(1,383)	$	(107)	$	(1,269)	$	(1,376)
ABS/CMBS*
Fair value	$	31,524	$	4,157	$	35,681	$	63,782	$	11,616	$	75,398
Cost or amortized cost		31,845		4,180		36,025		64,084		11,725		75,809
Unrealized Loss	$	(321)	$	(23)	$	(344)	$	(302)	$	(109)	$	(411)
Corporate
Fair value	$	230,965	$	9,825	$	240,790	$	123,617	$	14,488	$	138,105
Cost or amortized cost		239,010		10,400		249,410		127,634		14,661		142,295
Unrealized Loss	$	(8,045)	$	(575)	$	(8,620)	$	(4,017)	$	(173)	$	(4,190)
Municipal
Fair value	$	173,994	$	—	$	173,994	$	12,382	$	19,019	$	31,401
Cost or amortized cost		177,044		—		177,044		12,411		19,123		31,534
Unrealized Loss	$	(3,050)	$	—	$	(3,050)	$	(29)	$	(104)	$	(133)
Subtotal, fixed income
Fair value	$	510,809	$	34,089	$	544,898	$	217,037	$	106,657	$	323,694
Cost or amortized cost		523,193		35,249		558,442		221,503		108,312		329,815
Unrealized Loss	$	(12,384)	$	(1,160)	$	(13,544)	$	(4,466)	$	(1,655)	$	(6,121)
Equity securities
Fair value	$	14,227	$	—	$	14,227	$	10,837	$	—	$	10,837
Cost or amortized cost		15,330		—		15,330		11,835		—		11,835
Unrealized Loss	$	(1,103)	$	—	$	(1,103)	$	(998)	$	—	$	(998)
Total
Fair value	$	525,036	$	34,089	$	559,125	$	227,874	$	106,657	$	334,531
Cost or amortized cost		538,523		35,249		573,772		233,338		108,312		341,650
Unrealized Loss	$	(13,487)	$	(1,160)	$	(14,647)	$	(5,464)	$	(1,655)	$	(7,119)

* Non-agency asset-backed and commercial mortgage-backed

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The following table shows the composition of the fixed income securities in unrealized loss positions at June 30, 2015 by the National Association of Insurance Commissioners (NAIC) rating and the generally equivalent Standard & Poor’s (S&P) and Moody’s ratings. The vast majority of the securities are rated by S&P and/or Moody’s.

	Equivalent	Equivalent	(dollars in thousands)
NAIC	S&P	Moody’s	Amortized				Unrealized		Percent
Rating	Rating	Rating	Cost		Fair Value		Loss		to Total
1	AAA/AA/A	Aaa/Aa/A	$	422,894	$	414,108	$	(8,786)	64.9	%
2	BBB	Baa		90,037		86,789		(3,248)	24.0	%
3	BB	Ba		26,131		25,368		(763)	5.6	%
4	B	B		19,243		18,512		(731)	5.4	%
5	CCC orlower	Caa or lower		137		121		(16)	0.1	%
6				—		—		—	—
		Total	$	558,442	$	544,898	$	(13,544)	100.0	%

Evaluating Investments for OTTI

The fixed income portfolio contained 355 securities in an unrealized loss position as of June 30, 2015. The $13.5 million in associated unrealized losses for these 355 securities represents 0.9 percent of the fixed income portfolio’s cost basis. Of these 355 securities, 33 have been in an unrealized loss position for 12 consecutive months or longer. All fixed income securities in the investment portfolio continue to pay the expected coupon payments under the contractual terms of the securities. Any credit-related impairment related to fixed income securities we do not plan to sell and for which we are not more likely than not to be required to sell is recognized in net earnings, with the non-credit related impairment recognized in comprehensive earnings. Based on our analysis, our fixed income portfolio is of high credit quality and we believe we will recover the amortized cost basis of our fixed income securities. We continually monitor the credit quality of our fixed income investments to assess if it is probable that we will receive our contractual or estimated cash flows in the form of principal and interest. There were no other-than-temporary impairment (OTTI) losses recognized in net earnings or other comprehensive earnings in the periods presented on the fixed income portfolio.

As of June 30, 2015, we held five common stock securities that were in an unrealized loss position. The unrealized loss on these securities was $1.1 million. Based on our analysis, we believe each security will recover in a reasonable period of time and we have the intent and ability to hold them until recovery. No equity securities have been in an unrealized loss position for 12 consecutive months or longer. There were no OTTI losses recognized in the periods presented on the equity portfolio.

Other Invested Assets

Other invested assets include an investment in a low income housing tax credit partnership, carried at amortized cost, and membership in the Federal Home Loan Bank Chicago (FHLBC), carried at cost. Our interest in a low income housing tax credit partnership had a balance of $9.5 million at June 30, 2015 compared to $9.8 million at December 31, 2014 and recognized a total tax benefit of $0.2 million during the second quarter of 2015 and $0.5 million during the six-month period ended June 30, 2015. Our investment in FHLBC stock totaled $1.6 million at June 30, 2015 compared to $1.8 million at December 31, 2014.

Cash and Short-term Investments

Cash consists of uninvested balances in bank accounts. We had a cash balance of $27.1 million at the end of the second quarter of 2015, compared to $30.6 million at the end of 2014. Short-term investments are carried at cost, which approximates fair value. The balance at June 30, 2015 was $10.2 million compared to $16.3 million at December 31, 2014.

3.FAIR VALUE MEASUREMENTS

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Fair value is defined as the price in the principal market that would be received for an asset to facilitate an orderly transaction between market participants on the measurement date.

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We determined the fair value of certain financial instruments based on their underlying characteristics and relevant transactions in the marketplace. GAAP guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance also describes three levels of inputs that may be used to measure fair value.

Financial assets are classified based upon the lowest level of significant input that is used to determine fair value. The following are the levels of the fair value hierarchy and a brief description of the type of valuation inputs that are used to establish each level:

Pricing Level 1 is applied to valuations based on readily available, unadjusted quoted prices in active markets for identical assets.

Pricing Level 2 is applied to valuations based upon quoted prices for similar assets in active markets, quoted prices for identical or similar assets in inactive markets; or valuations based on models where the significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities) or can be corroborated by observable market data.

Pricing Level 3 is applied to valuations that are derived from techniques in which one or more of the significant inputs are unobservable.

As a part of management’s process to determine fair value, we utilize widely recognized, third-party pricing sources to determine our fair values. We have obtained an understanding of the third-party pricing sources’ valuation methodologies and inputs. The following is a description of the valuation techniques used for financial assets that are measured at fair value, including the general classification of such assets pursuant to the fair value hierarchy.

Corporate, Agencies, Government and Municipal Bonds: The pricing vendor employs a multi-dimensional model which uses standard inputs including (listed in approximate order of priority for use) benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers and other reference data. The pricing vendor also monitors market indicators, as well as industry and economic events. All bonds valued using these techniques are classified as Level 2. All corporate, agency, government and municipal securities were deemed Level 2.

Mortgage-backed Securities (MBS)/Commercial Mortgage-backed Securities (CMBS) and Asset-backed Securities (ABS): The pricing vendor evaluation methodology includes principally interest rate movements and new issue data. Evaluation of the tranches (non-volatile, volatile or credit sensitivity) is based on the pricing vendors’ interpretation of accepted modeling and pricing conventions. This information is then used to determine the cash flows for each tranche, benchmark yields, prepayment assumptions and to incorporate collateral performance. To evaluate MBS and CMBS volatility, an option adjusted spread model is used in combination with models that simulate interest rate paths to determine market price information. This process allows the pricing vendor to obtain evaluations of a broad universe of securities in a way that reflects changes in yield curve, index rates, implied volatility, mortgage rates and recent trade activity. MBS/CMBS and ABS with corroborated, observable inputs are classified as Level 2. All of our MBS/CMBS and ABS are deemed Level 2.

Common Stock: Exchange traded equities have readily observable price levels and are classified as Level 1 (fair value based on quoted market prices). All of our common stock holdings are deemed Level 1.

For the Level 2 securities, as described above, we periodically conduct a review to assess the reasonableness of the fair values provided by our pricing services. Our review consists of a two pronged approach. First, we compare prices provided by our pricing services to those provided by an additional source. Second, we obtain prices from securities brokers and compare them to the prices provided by our pricing services. In both comparisons, when discrepancies are found, we compare our prices to actual reported trade data for like securities. Based on this assessment, we determined that the fair values of our Level 2 securities provided by our pricing services are reasonable.

For common stock, we receive prices from a nationally recognized pricing service. Prices are based on observable inputs in an active market and are therefore disclosed as Level 1. Based on this assessment, we determined that the fair values of our Level 1 securities provided by our pricing service are reasonable.

Due to the relatively short-term nature of cash, short-term investments, accounts receivable and accounts payable, their carrying amounts are reasonable estimates of fair value.

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Assets measured at fair value in the accompanying unaudited condensed consolidated interim financial statements on a recurring basis are summarized below:

	As of June 30,  2015
	Fair Value Measurements Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Available-for-sale securities
U.S. government	$	—	$	30,400	$	—	$	30,400
U.S. agency		—		13,644		—		13,644
Non-U.S. govt. & agency		—		1,840		—		1,840
Agency MBS		—		239,180		—		239,180
ABS/CMBS*		—		88,299		—		88,299
Corporate		—		601,960		—		601,960
Municipal		—		562,042		—		562,042
Equity		391,152		—		—		391,152
Total available-for-sale securities	$	391,152	$	1,537,365	$	—	$	1,928,517

*Non-agency asset-backed and commercial mortgage-backed

	As of December 31,  2014
	Fair Value Measurements Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Available-for-sale securities
U.S. government	$	—	$	33,788	$	—	$	33,788
U.S. agency		—		6,747		—		6,747
Non-U.S. govt. & agency		—		10,665		—		10,665
Agency MBS		—		264,468		—		264,468
ABS/CMBS*		—		135,304		—		135,304
Corporate		—		562,690		—		562,690
Municipal		—		481,425		—		481,425
Equity		410,642		—		—		410,642
Total available-for-sale securities	$	410,642	$	1,495,087	$	—	$	1,905,729

* Non-agency asset-backed and commercial mortgage-backed

As noted in the above table, we did not have any assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period. Additionally, there were no securities transferred in or out of levels 1 or 2 during the six-month period ended June 30, 2015.

4.  INCOME TAXES

Our effective tax rate for the three and six-month periods ended June 30, 2015 was 32 percent compared to 31 percent for the same periods in 2014. Effective rates are dependent upon components of pretax earnings and the related tax effects. The effective rate was higher for the three and six-month periods ended June 30, 2015 due to an increase in underwriting income compared to the same periods in 2014.

Income tax expense attributable to income from operations for the three and six-month periods ended June 30, 2015 and 2014 differed from the amounts computed by applying the U.S. federal tax rate of 35 percent to pretax income as a result of the following:

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	For the Three-Month Periods Ended June 30,								For the Six-Month Periods Ended June 30,
	2015				2014				2015				2014
(in thousands)	Amount		%		Amount		%		Amount		%		Amount		%
Provision for income taxes at the statutory rate of 35%	$	19,127	35	%	$	18,348	35	%	$	34,707	35	%	$	33,045	35	%
Increase (reduction) in taxes resulting from:
Tax exempt interest income		(1,054)	(2)	%		(1,048)	(2)	%		(2,016)	(2)	%		(2,082)	(2)	%
Dividends received deduction		(535)	(1)	%		(533)	(1)	%		(1,112)	(1)	%		(1,131)	(1)	%
ESOP dividends paid deduction		(238)	—	%		(220)	(1)	%		(458)	—	%		(421)	(1)	%
Other items, net		165	—	%		151	—	%		259	—	%		309	—	%
Total tax expense	$	17,465	32	%	$	16,698	31	%	$	31,380	32	%	$	29,720	31	%

5.  STOCK BASED COMPENSATION

Our RLI Corp. Omnibus Stock Plan (omnibus plan) was in place from 2005 to 2010. The omnibus plan provided for equity-based compensation, including stock options, up to a maximum of 3,000,000 shares of common stock (subject to adjustment for changes in our capitalization and other events). Between 2005 and 2010, we granted 2,458,059 stock options under this plan, including incentive stock options (ISOs), which were adjusted as part of the special dividends paid in 2014 and prior years. The omnibus plan was replaced in 2010.

In 2010, our shareholders approved the RLI Corp. Long-Term Incentive Plan (2010 LTIP), which provides for equity-based compensation and replaced the omnibus plan. In conjunction with the adoption of the 2010 LTIP, effective May 6, 2010, options were no longer granted under the omnibus plan. The 2010 LTIP provided for equity-based compensation, including stock options, up to a maximum of 4,000,000 shares of common stock (subject to adjustment for changes in our capitalization and other events). Between 2010 and 2015, we granted 2,878,000 stock options under the 2010 LTIP, including 53,500 in the first quarter of 2015. The 2010 LTIP was replaced in the second quarter of 2015.

During the second quarter of 2015, our shareholders approved the 2015 RLI Corp. Long-Term Incentive Plan (2015 LTIP), which provides for equity-based compensation and replaced the 2010 LTIP. In conjunction with the adoption of the 2015 LTIP, effective May 7, 2015, options were no longer granted under the 2010 LTIP. Awards under the 2015 LTIP may be in the form of restricted stock, stock options (non-qualified only), stock appreciation rights, performance units as well as other stock-based awards. Eligibility under the 2015 LTIP is limited to employees or directors of the company or any affiliate. The granting of awards under the 2015 LTIP is solely at the discretion of the board of directors. The maximum number of shares of common stock available for distribution under the 2015 LTIP is 4,000,000 shares (subject to adjustment for changes in our capitalization and other events). Thus far in 2015, we have granted 412,000 stock options under the 2015 LTIP.

Under the 2015 LTIP, as under the 2010 LTIP and omnibus plan, we grant stock options for shares with an exercise price equal to the fair market value of the shares at the date of grant (subject to adjustments for changes in our capitalization, special dividends and other events as set forth in such plans). Options generally vest and become exercisable ratably over a five-year period and expire eight years after grant.

For most participants, the requisite service period and vesting period will be the same. For participants who are retirement eligible, defined by the plan as those individuals whose age and years of service equals 75, the requisite service period is deemed to be met and options are immediately expensed on the date of grant. For participants who will become retirement eligible during the vesting period, the requisite service period over which expense is recognized is the period between the grant date and the attainment of retirement eligibility. Shares issued upon option exercise are newly issued shares.

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The following tables summarize option activity for the periods ended June 30, 2015 and 2014:

				Weighted
		Weighted		Average	Aggregate
	Number of	Average		Remaining	Intrinsic
	Options	Exercise		Contractual	Value
	Outstanding	Price		Life	(in 000’s)
Outstanding options at January 1, 2015	2,892,717	$	26.65
Options granted	465,500	$	49.52
Options exercised	(215,617)	$	18.97		$	6,620
Options canceled/forfeited	(4,560)	$	31.87
Outstanding options at June 30, 2015	3,138,040	$	30.56	5.28	$	65,356
Exercisable options at June 30, 2015	1,441,660	$	22.48	4.02	$	41,674
				Weighted
		Weighted		Average	Aggregate
	Number of	Average		Remaining	Intrinsic
	Options	Exercise		Contractual	Value
	Outstanding	Price		Life	(in 000’s)
Outstanding options at January 1, 2014	2,595,084	$	26.04
Options granted	420,000	$	42.88
Options exercised	(43,872)	$	18.31		$	1,139
Options canceled/forfeited	(740)	$	16.51
Outstanding options at June 30, 2014	2,970,472	$	28.53	5.47	$	51,232
Exercisable options at June 30, 2014	1,300,292	$	22.02	4.21	$	30,894

The majority of our stock options are granted annually at our regular board meeting in May. In addition, options are approved at the May meeting for quarterly grants to certain retirement eligible employees. Since stock option grants to retirement eligible employees are fully expensed when issued, the approach allows for a more even expense distribution throughout the year.

Thus far in 2015, 465,500 stock options were granted with a weighted average exercise price of $49.52 and a weighted average fair value of $8.94. We recognized $1.1 million of expense in the second quarter of 2015 and $2.0 million in the first six months of 2015 related to options vesting. Since options granted under 2010 LTIP and 2015 LTIP are non-qualified, we recorded a tax benefit of $0.4 million in the second quarter of 2015 and $0.7 million in the first six months of 2015 related to this compensation expense. Total unrecognized compensation expense relating to outstanding and unvested options was $6.8 million, which will be recognized over the remainder of the vesting period. Comparatively, we recognized $1.2 million of expense in the second quarter of 2014 and $2.1 million of expense in the first six months of 2014. We recorded a tax benefit of $0.4 million in the second quarter of 2014 and $0.7 million in the first six months of 2014 related to this compensation expense.

The fair value of options was estimated using a Black-Scholes based option pricing model with the following weighted average grant-date assumptions and weighted average fair values as of June 30:

	2015			2014
Weighted-average fair value of grants	$	8.94		$	7.76
Risk-free interest rates		1.54	%		1.70	%
Dividend yield		1.81	%		1.94	%
Expected volatility		22.89	%		23.22	%
Expected option life		5.21	years		5.18	years

The risk-free rate was determined based on U.S. treasury yields that most closely approximated the option’s expected life. The dividend yield was calculated based on the average annualized ordinary dividends paid during the most recent five-year period. It excluded the special dividends paid in the fourth quarters of 2014 and prior years. The expected volatility was calculated based on the median of the rolling volatilities for the expected life of the options. The expected option life was determined based on historical exercise behavior and the assumption that all outstanding options will be exercised at the midpoint of the current date and remaining contractual term, adjusted for the demographics of the current year’s grant.

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During the first quarter of 2014, each outside director received $10,000 worth of restricted common shares from the 2010 LTIP as part of director compensation. The shares were directly owned by each director on the date of issuance and included a one-year restriction on the sale or transfer of such shares. In the first quarter of 2014, we issued a total of 2,097 restricted shares and recognized $0.1 million of compensation expense. This restricted share program was terminated in 2014.

6.  OPERATING SEGMENT INFORMATION

Selected information by operating segment is presented in the table below. Additionally, the table reconciles segment totals to total earnings and total revenues.

	For the Three-Month Periods				For the Six-Month Periods
REVENUES	Ended June 30,				Ended June 30,
(in thousands)	2015		2014		2015		2014
Net premiums earned:
Casualty	$	101,914	$	94,360	$	200,682	$	185,337
Property		41,281		48,791		83,399		92,109
Surety		29,144		25,453		57,261		52,290
Segment totals before income taxes	$	172,339	$	168,604	$	341,342	$	329,736
Net investment income		13,431		13,982		26,926		27,564
Net realized gains		4,802		10,431		18,088		16,932
Total consolidated revenue	$	190,572	$	193,017	$	386,356	$	374,232
NET EARNINGS
(in thousands)	2015		2014		2015		2014
Casualty	$	19,201	$	16,467	$	24,473	$	22,545
Property		4,828		2,293		13,004		11,971
Surety		10,807		7,809		14,997		14,585
Net underwriting income	$	34,836	$	26,569	$	52,474	$	49,101
Net investment income		13,431		13,982		26,926		27,564
Net realized gains		4,802		10,431		18,088		16,932
General corporate expense and interest on debt		(4,605)		(4,423)		(8,705)		(8,472)
Equity in earnings of unconsolidated investees		6,186		5,864		10,380		9,289
Total earnings before income taxes	$	54,650	$	52,423	$	99,163	$	94,414
Income tax expense		17,465		16,698		31,380		29,720
Total net earnings	$	37,185	$	35,725	$	67,783	$	64,694

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The following table further summarizes revenues by major product type within each operating segment:

	For the Three-Month Periods				For the Six-Month Periods
NET PREMIUMS EARNED	Ended June 30,				Ended June 30,
(in thousands)	2015		2014		2015		2014
Casualty
Commercial and personal umbrella	$	26,012	$	25,024	$	51,309	$	49,780
General liability		20,607		20,523		40,579		40,455
Professional services		17,641		13,839		34,721		26,700
Commercial transportation		15,117		15,005		29,798		29,516
P&C package business		9,909		8,495		19,558		16,778
Executive products		4,601		4,721		9,286		9,405
Medical professional liability		3,032		3,724		6,136		7,424
Other casualty		4,995		3,029		9,295		5,279
Total	$	101,914	$	94,360	$	200,682	$	185,337
Property
Commercial property	$	19,049	$	20,054	$	38,952	$	40,487
Marine		10,984		12,962		22,901		25,163
Specialty personal		6,657		6,709		13,447		12,817
Property reinsurance		3,342		3,387		6,359		6,748
Crop reinsurance		1,222		5,683		1,687		6,869
Other property		27		(4)		53		25
Total	$	41,281	$	48,791	$	83,399	$	92,109
Surety
Miscellaneous	$	10,489	$	9,598	$	20,657	$	19,080
Commercial		7,592		6,313		14,493		12,447
Contract		6,789		6,256		13,619		13,017
Oil and Gas		4,274		3,286		8,492		7,746
Total	$	29,144	$	25,453	$	57,261	$	52,290
Grand Total	$	172,339	$	168,604	$	341,342	$	329,736

7.  ACQUISITION

On February 5, 2014, we invested $5.3 million for a 20 percent equity ownership interest in Prime Holdings Insurance Services, Inc. (Prime), an Illinois domiciled insurance carrier based in Salt Lake City, Utah. On March 4, 2015 we invested an additional $1.7 million, increasing our total equity ownership to 27 percent. Prime’s primary subsidiary, Prime Insurance Company, is a privately-held excess and surplus lines insurance company operating in 49 states and territories through a network of wholesale brokers and specializing in hard-to-place risks. The investment in Prime is reflected on our balance sheet as an investment in unconsolidated investee. Under the equity method of accounting we recognize our proportionate share of Prime’s income as equity in earnings of unconsolidated investees. Our share of Prime’s earnings amounted to $0.3 million in the second quarter of 2015 and $0.8 million in the first six months of 2015. Comparatively, our share of Prime’s earnings amounted to $0.2 million in the second quarter of 2014 and $0.3 million in the first six months of 2014.

Additionally, we entered into a 25 percent quota share reinsurance treaty with Prime’s two insurance subsidiaries, effective January 1, 2014. We assumed gross premiums of $3.6 million in the second quarter of 2015 and $6.7 million in the first six months of 2015 related to this quota share agreement. Comparatively, we assumed gross premiums of $2.5 million in the second quarter of 2014 and $5.0 million in the first six months of 2014 related to this quota share agreement.

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

“SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: This discussion and analysis may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. Various risk factors that could affect future results are listed in our filings with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the year ended December 31, 2014.

OVERVIEW

We underwrite selected property and casualty insurance through major subsidiaries collectively known as RLI Insurance Group (the Group). We conduct operations principally through four insurance companies. These companies are organized in a vertical structure beneath RLI Corp. with RLI Insurance Company (RLI Ins.) as the first-level, or principal, insurance subsidiary. RLI Ins. writes multiple lines of insurance on an admitted basis in all 50 states, the District of Columbia and Puerto Rico. Mt. Hawley Insurance Company (Mt. Hawley), a subsidiary of RLI Ins., writes excess and surplus lines insurance on a non-admitted basis in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands and Guam. RLI Indemnity Company (RIC), a subsidiary of Mt. Hawley, has authority to write multiple lines of insurance on an admitted basis in 48 states and the District of Columbia. Contractors Bonding and Insurance Company (CBIC), a subsidiary of RLI Ins., has authority to write multiple lines of insurance on an admitted basis in all 50 states and the District of Columbia. Each of our insurance companies is domiciled in Illinois. We are an Illinois corporation that was organized in 1965.

As a specialty company with a niche focus, we offer insurance coverages in both the specialty admitted and excess and surplus markets. Coverages in the specialty admitted market, such as our oil and gas surety bonds, are for risks that are unique or hard-to-place in the standard market, but must remain with an admitted insurance company for regulatory or marketing reasons. In addition, our coverages in the specialty admitted market may be designed to meet specific insurance needs of targeted insured groups, such as our professional liability and package coverages for design professionals and our stand-alone personal umbrella policy. The specialty admitted market is subject to more state regulation than the excess and surplus market, particularly with regard to rate and form filing requirements, restrictions on the ability to exit lines of business, premium tax payments and membership in various state associations, such as state guaranty funds and assigned risk plans. We also underwrite coverages in the excess and surplus market. The excess and surplus market, unlike the standard admitted market, is less regulated and more flexible in terms of policy forms and premium rates. This market provides an alternative for customers with risks or loss exposures that generally cannot be written in the standard admitted market. This typically results in coverages that are more restrictive and more expensive than coverages in the standard admitted market. When we underwrite within the excess and surplus market, we are selective in the lines of business and type of risks we choose to write. Using our non-admitted status in this market allows us to tailor terms and conditions to manage these exposures effectively. Often, the development of these coverages is generated through proposals brought to us by an agent or broker seeking coverage for a specific group of clients or loss exposures. Once a proposal is submitted, our underwriters determine whether it would be a viable product based on our business objectives.

The foundation of our overall business strategy is to underwrite for profit in all market conditions and we achieved this for 19 consecutive years, averaging an 87.4 combined ratio over that period of time. This foundation drives our ability to provide shareholder returns in three different ways: the underwriting income itself, net investment income from our investment portfolio and long-term appreciation in our equity portfolio. Our investment strategy is based on preservation of capital as the first priority, with a secondary focus on generating total return. The fixed income portfolio consists primarily of highly-rated, diversified, liquid investment-grade securities. Consistent underwriting income allows a portion of our shareholders’ equity to be invested in equity securities. Our equity portfolio consists of a core stock portfolio weighted toward dividend-paying stocks, as well as exchange traded funds (ETFs). Our minority equity ownership interests in Maui Jim, Inc. (Maui Jim), a manufacturer of high-quality sunglasses, and Prime Holdings Insurance Services, Inc. (Prime), a specialty excess and surplus insurance company, has also enhanced overall returns. We have a diversified investment portfolio and closely monitor our investment risks. Despite periodic fluctuations in market value, our equity portfolio is part of a long-term asset allocation strategy and has contributed significantly to our historic growth in book value.

We measure the results of our insurance operations by monitoring certain measures of growth and profitability across three distinct business segments: casualty, property and surety. Growth is measured in terms of gross premiums written and

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profitability is analyzed through combined ratios, which are further subdivided into their respective loss and expense components.

The property and casualty insurance business is cyclical and influenced by many factors, including price competition, economic conditions, natural or man-made disasters (for example, earthquakes, hurricanes and terrorism), interest rates, state regulations, court decisions and changes in the law.

One of the unique and challenging features of the property and casualty insurance business is that coverages must be priced before costs have fully developed, because premiums are charged before claims are incurred. This requires that liabilities be estimated and recorded in recognition of future loss and settlement obligations. Due to the inherent uncertainty in estimating these liabilities, there can be no assurance that actual liabilities will not be more or less than recorded amounts; if actual liabilities differ from recorded amounts, there will be an adverse or favorable effect on net earnings. In evaluating the objective performance measures previously mentioned, it is important to consider the following individual characteristics of each major insurance segment.

The casualty portion of our business consists largely of general liability, personal umbrella, transportation, executive products and commercial umbrella coverages, as well as package business and other specialty coverages, such as professional liability and workers compensation for office-based professionals. We offer fidelity and crime coverage for commercial insureds and select financial institutions and recently expanded our casualty offerings to include medical and healthcare professional liability coverage in the excess and surplus market. We also assume select casualty business for excess and surplus accounts through our quota share reinsurance agreement with Prime. The casualty business is subject to the risk of estimating losses and related loss reserves because the ultimate settlement of a casualty claim may take several years to fully develop. The casualty segment is also subject to inflation risk and may be affected by evolving legislation and court decisions that define the extent of coverage and the amount of compensation due for injuries or losses.

Our property segment is comprised primarily of commercial fire, earthquake, difference in conditions, marine and facultative and treaty reinsurance including crop. We also offer select personal lines policies, such as recreational vehicle and Hawaii homeowners coverages. While our marine and facultative reinsurance coverages are predominantly domestic risks, these portfolios do contain a relatively small portion of foreign risks. Property insurance and reinsurance results are subject to the variability introduced by perils such as earthquakes, fires and hurricanes. Our major catastrophe exposure is to losses caused by earthquakes, primarily on the West Coast. Our second largest catastrophe exposure is to losses caused by wind storms to commercial properties throughout the Gulf and East Coast, as well as to homes we insure in Hawaii. We limit our net aggregate exposure to a catastrophic event by minimizing the total policy limits written in a particular region, purchasing reinsurance and maintaining policy terms and conditions throughout market cycles. We also use computer-assisted modeling techniques to provide estimates that help us carefully manage the concentration of risks exposed to catastrophic events. Our assumed multi-peril crop and hail treaty reinsurance business covers revenue shortfalls or production losses due to natural causes such as drought, excessive moisture, hail, wind, frost, insects and disease. Significant aggregation of these losses is mitigated by the U.S. Federal Government reinsurance program that provides stop loss protection inuring to our benefit.As noted in previous filings, our portion of assumed crop reinsurance was reduced for 2015 and will expire at the end of the current crop year due to the acquisition of the cedant.

The surety segment specializes in writing small-to-large commercial and contract surety coverages, as well as those for the energy, petrochemical and refining industries. We offer miscellaneous bonds including license and permit, notary and court bonds. Often, our surety coverages involve a statutory requirement for bonds. While these bonds typically maintain a relatively low loss ratio, losses may fluctuate due to adverse economic conditions affecting the financial viability of our insureds. The contract surety product guarantees the construction work of a commercial contractor for a specific project. Generally, losses occur due to the deterioration of a contractor’s financial condition. This line has historically produced marginally higher loss ratios than other surety lines during economic downturns.

The insurance marketplace remains intensely competitive. New entrants, alternative capital and a lack of significant catastrophe activity led to flat or declining prices for many coverages in 2014, and continues to impact our business. Despite these challenges, we believe that our business model is built to create underwriting income by focusing on sound risk selection and discipline. Our primary focus will continue to be on underwriting profitability, with a secondary focus on premium growth where we believe underwriting profit exists, as opposed to general premium growth or market share measurements.

On May 27, 2015, RLI Ins. and Mt. Hawley entered into a stock purchase agreement to sell RIC to Clear Blue Financial Holdings, LLC, for $7.5 million to be paid in cash at closing. RIC is being sold as a “shell” with the primary value being derived from the transfer of insurance licenses. RIC has minimal assets and written premium and is currently transferring all

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premium and loss cash flows to RLI Ins. through a 100 percent reinsurance agreement. After closing, RLI Ins. will reinsure all then-existing RIC bond and insurance liabilities, adjust claims and service the remaining in-force policies and bonds until they terminate or are moved into RLI Ins. The transaction is structured as a sale of the stock of RIC by Mt. Hawley and is subject to Form A approval, a revision to the existing reinsurance agreement and a dividend, all of which are subject to insurance department regulatory approval. We would expect to close promptly after such approvals are secured.

GAAP and non-GAAP Financial Performance Metrics

Throughout this quarterly report, we present our operations in the way we believe will be most meaningful, useful and transparent to anyone using this financial information to evaluate our performance. In addition to the GAAP presentation of net income, we show certain statutory reporting information and other non-GAAP financial measures that we believe are valuable in managing our business and drawing comparisons to our peers. These measures are underwriting income, combined ratios and net unpaid loss and settlement expenses.

Following is a list of non-GAAP measures found throughout this report with their definitions, relationships to GAAP measures and explanations of their importance to our operations.

Underwriting Income

Underwriting income or profit represents one measure of the pretax profitability of our insurance operations and is derived by subtracting losses and settlement expenses, policy acquisition costs and insurance operating expenses from net premiums earned. Each of these captions is presented in the statements of earnings, but not subtotaled. However, this information is available in total and by segment in note 11 to the consolidated financial statements in our 2014 Annual Report on Form 10-K, regarding operating segment information. The nearest comparable GAAP measure is earnings before income taxes which, in addition to underwriting income, includes net investment income, net realized gains/losses on investments, general corporate expenses, debt costs and earnings from unconsolidated investees.

Combined Ratio

This ratio is a common industry measure of profitability for any underwriting operation and is calculated in two components. First, the loss ratio is losses and settlement expenses divided by net premiums earned. The second component, the expense ratio, reflects the sum of policy acquisition costs and insurance operating expenses, divided by net premiums earned. All items included in these components of the combined ratio are presented in our GAAP financial statements. The sum of the loss and expense ratios is the combined ratio. The difference between the combined ratio and 100 reflects the per-dollar rate of underwriting income or loss. For example, a combined ratio of 85 implies that for every $100 of premium we earn, we record $15 of underwriting income.

Net Unpaid Loss and Settlement Expenses

Unpaid losses and settlement expenses, as shown in the liabilities section of our balance sheets, represents the total obligations to claimants for both estimates of known claims and estimates for incurred but not reported (IBNR) claims. The related asset item, reinsurance balances recoverable on unpaid losses and settlement expense, is the estimate of known claims and estimates of IBNR that we expect to recover from reinsurers. The net of these two items is generally referred to as net unpaid loss and settlement expenses and is commonly used in our disclosures regarding the process of establishing these various estimated amounts.

Critical Accounting Policies

In preparing the unaudited condensed consolidated interim financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ significantly from those estimates.

The most critical accounting policies involve significant estimates and include those used in determining the liability for unpaid losses and settlement expenses, investment valuation and OTTI, recoverability of reinsurance balances, deferred policy acquisition costs and deferred taxes. For a detailed discussion of each of these policies, refer to our 2014 Annual Report on Form 10-K. There have been no significant changes to any of these policies during the current year.

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SIX MONTHS ENDED JUNE 30, 2015 COMPARED TO SIX MONTHS ENDED JUNE 30, 2014

Consolidated revenues, as displayed in the table that follows, totaled $386.4 million for the first six months of 2015 compared to $374.2 million for the same period in 2014.

	For the Six-Month Periods
	Ended June 30,
	2015		2014
Consolidated revenues (in thousands)
Net premiums earned	$	341,342	$	329,736
Net investment income		26,926		27,564
Net realized investment gains		18,088		16,932
Total consolidated revenue	$	386,356	$	374,232

Consolidated revenue for the first six months of 2015 increased $12.1 million, or 3 percent, from the same period in 2014. Net premiums earned for the Group increased 4 percent, driven by growth from our casualty and surety segments, which were up 8 percent and 10 percent, respectively. Due to the current low yield environment, net investment income decreased 2 percent to $26.9 million. Net realized investment gains totaled $18.1 million in the first six months of 2015, compared to $16.9 million in 2014.

Net after-tax earnings for the first six months of 2015 totaled $67.8 million, $1.54 per diluted share, compared to $64.7 million, $1.48 per diluted share, for the same period last year. Results for both periods reflected positive underwriting results for the current accident year and also benefited from favorable development on prior years’ loss reserves. From a prior accident year standpoint, favorable development resulted in additional pretax earnings of $43.5 million in the first six months of 2015 compared to $42.3 million in 2014. Results for 2014 also include $1.3 million of reinsurance reinstatement premium related to unfavorable development on prior years’ surety reserves. Underwriting results for both periods were impacted by losses from storm activity, which totaled $7.4 million in the first half of 2015, compared to $8.0 million for the same period last year. Bonus and profit sharing-related expenses related to prior year reserve development and storm losses totaled $5.3 million in 2015, compared to $4.5 million in 2014. These performance-related expenses affected policy acquisition, insurance operating and general corporate expenses. Bonus and profit-sharing amounts earned by executives, managers and associates are predominately influenced by corporate performance including operating earnings, combined ratio and return on capital.

During the first six months of 2015, equity in earnings of unconsolidated investees totaled $10.4 million. This amount includes $9.6 million from Maui Jim and $0.8 million from Prime. Comparatively, the first six months of 2014 reflected $9.3 million of earnings, including $9.0 million from Maui Jim and $0.3 million from Prime. Refer to Note 6, Acquisitions, for more information regarding our recent investments in Prime.

Comprehensive earnings, which include net earnings plus other comprehensive earnings (primarily the change in unrealized gains/losses net of tax), totaled $35.3 million, $0.80 per diluted share, for the first six months of 2015, compared to $102.4 million, $2.34 per diluted share, for the first half of 2014. Unrealized losses, net of tax, in the first six months of 2015 were $32.5 million, compared to unrealized gains of $37.7 million for the same period in 2014. Unrealized losses in the current year were split evenly between the equity and fixed income portfolios.

RLI INSURANCE GROUP

As reflected in the table below, gross premiums written for the Group decreased 5 percent to $438.7 million for the first six months of 2015. The overall decline was driven by our property segment, down 29 percent, due largely to reduced premium from our assumed crop business. Excluding the impact of crop, gross premiums written increased 4 percent from prior year, as our casualty and surety segments each delivered solid growth. From a pricing standpoint, trends have varied across our product portfolio. While certain products such as transportation, recreational vehicles and umbrella have achieved price increases during the year, excess and surplus property coverages continue to face a difficult rate environment. Most notably, double digit price declines for catastrophe exposed coverages have persisted through the first half of 2015. Net premiums written were up slightly in the first six months of 2015, as cost savings realized during our 2015 reinsurance renewals served to offset the decline seen on a gross basis. During the first half of 2015 we renewed all material reinsurance treaties, which resulted in an $8.5 million reduction in ceded premiums from improved reinsurance rates, while some coverages were expanded. Excluding the impact of crop, net premiums written increased 6 percent. On a net premiums earned basis, premiums increased $11.6 million, or 4 percent, due to overall growth experienced in recent periods. Much of this growth is attributable to our casualty and surety segments, where net premiums earned were up 8 percent and 10 percent, respectively. Underwriting income for the

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Group totaled $52.5 million for the first six months of 2015, compared to $49.1 million in 2014. Results for both periods reflect similar amounts of favorable development in prior years’ loss and catastrophe reserves. Net storm losses in the current year were $0.5 million less than in 2014. Both periods also delivered positive underwriting results from a current accident year standpoint. The GAAP combined ratio totaled 84.6 in 2015, compared to 85.1 in 2014. The loss ratio decreased to 42.6 from 43.8, while the Group’s expense ratio increased slightly to 42.0 from 41.3.

	For the Six-Month Periods
	Ended June 30,
	2015		2014
Gross premiums written (in thousands)
Casualty	$	264,792	$	244,238
Property		112,938		159,888
Surety		60,936		57,442
Total	$	438,666	$	461,568
Underwriting income (in thousands)
Casualty	$	24,473	$	22,545
Property		13,004		11,971
Surety		14,997		14,585
Total	$	52,474	$	49,101
Combined ratio
Casualty		87.8		87.8
Property		84.4		87.0
Surety		73.8		72.1
Total		84.6		85.1

Casualty

Gross premiums written for the casualty segment increased 8 percent, to $264.8 million for the first six months of 2015, compared to $244.2 million for the first six months of 2014. Growth in the segment was led by transportation, which increased $7.9 million (19 percent) to $48.4 million, due largely to increased opportunities to write new business. Improved pricing for transportation coverages during the first half of the year also benefited top line production. Our professional services group and P&C package business also made significant contributions to overall growth, up 16 percent and 17 percent, respectively, as expansion efforts for these products continued. Assumed premium from our quota share reinsurance treaty with Prime’s two insurance subsidiaries improved as well, up $1.7 million (34 percent) in the first half of 2015. Growth from these products offset a moderate decline from our executive products book, which decreased $1.1 million (5 percent), due to competitive pressures in this market.

The casualty segment recorded underwriting income of $24.5 million in the first six months of 2015, compared to $22.5 million for the same period last year. Underwriting results for both periods benefited from favorable development on prior years’ loss and catastrophe reserves. During the first half of 2015, we released reserves which improved the segment’s underwriting results by $28.7 million. Products with favorable development included general liability, umbrella, transportation, P&C package, professional services group and medical professional liability, while executive products experienced unfavorable development. From an accident year standpoint, the majority of the favorable development occurred on more recent accident years (2007-2014). Losses from 2015 storms were minimal, impacting results by $0.1 million. Comparatively, 2014 results included favorable development on prior accident years’ loss reserves, primarily for general liability, umbrella, P&C package, transportation, professional services and executive products, which improved the segment’s underwriting results by $29.3 million. Results for 2014 were also impacted by storm losses, primarily related to our P&C package business, which reduced underwriting income for the segment by $1.9 million.

Segment results for 2015 translated into a combined ratio of 87.8, the same as in 2014. The segment’s loss ratio was 52.3 in 2015, improved slightly from 52.6 in the prior year. From an expense standpoint, results were also consistent across both periods, as the segments’ expense ratio was 35.5 in 2015 compared to 35.2 in 2014.

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Property

Gross premiums written for the Group’s property segment totaled $112.9 million for the first six months of 2015, a decrease of $47.0 million, or 29 percent, from the same period last year. The majority of this decline relates to our crop reinsurance business, which declined $39.2 million (83 percent). As noted in previous filings, we expect reduced premiums as our crop reinsurance share was reduced for 2015 and will expire at the end of the current crop year due to the acquisition of the cedant.

This segment continues to be pressured by increased competition and alternative capital, which has led to decreased rates for excess and surplus property coverages. The declining rate environment impacted premiums from our commercial property business, as our fire and difference in conditions products declined 9 percent and 12 percent, respectively. Our recreational vehicles program also posted decreased premium in the first half of 2015, down 16 percent from the prior year. The decline in this book was due to re-underwriting efforts initiated in the latter part of 2014 in response to heightened loss activity. While premiums were down for the year, double digit rate increases on retained business have been achieved as a result of these efforts. Partially offsetting these declines was a modest increase in our other property reinsurance program, which was up 2 percent, while premiums from marine and Hawaii homeowners were flat versus the prior year.

Underwriting income for the segment was $13.0 million for the first six months of 2015, compared to $12.0 million for the same period last year. Results for both periods reflect positive underwriting income for the current accident year and favorable development on prior years’ loss and catastrophe reserves. Underwriting results for 2015 include favorable development on prior years’ loss and catastrophe reserves, primarily on marine business, which improved the segment’s underwriting results by $3.7 million. This favorable development partially offset losses recorded on 2015 storms, which reduced the segment’s underwriting results by $6.2 million. From a comparative standpoint, underwriting results for 2014 included favorable development of $0.7 million and $4.9 million in storm losses.

Segment results for the first six months of 2015 translated into a combined ratio of 84.4 compared to 87.0 for the same period last year. The segment’s loss ratio decreased to 41.3 in 2015 from 47.4 in 2014 due to the increased benefit from favorable development on prior years’ reserves in 2015. From an expense standpoint, the segment’s expense ratio for the first six months of 2015 increased to 43.1, from 39.6 in the prior year. The increased expense ratio relates to shifts in product mix within the segment, in particular with regard to crop, which carried a very low acquisition expense rate.

Surety

The surety segment recorded gross premiums written of $60.9 million for the first six months of 2015, an increase of $3.5 million, or 6 percent, from the same period last year. Premium growth was achieved despite highly competitive conditions in this space, as new entrants and increased capacity continue to impact the market. Growth was led by miscellaneous surety, which increased $2.2 million (11 percent) for the year, while commercial surety also delivered solid results, up $1.4 million (10 percent). Gross premiums written from oil and gas surety and contract surety were relatively flat.

The surety segment recorded underwriting income of $15.0 million, compared to $14.6 million for the same period last year. Both periods benefited from favorable development on prior years’ loss reserves and positive underwriting performance from a current accident year standpoint. Results for 2015 included favorable development on prior accident years’ loss reserves which improved the segment’s underwriting results by $5.5 million. Each product within the segment experienced favorable development. From a comparative standpoint, 2014 results included favorable development on prior accident years’ loss reserves which improved the segment’s underwriting results by $7.0 million. This favorable development was partially offset by reinsurance reinstatement premium related to unfavorable development on prior years’ surety reserves which reduced underwriting income by $1.1 million.

The combined ratio for the surety segment totaled 73.8 for the first six months of 2015, compared to 72.1 for the same period in 2014. The segment’s loss ratio was 10.5 for 2015, compared to 6.1 for 2014. The loss ratio increase was due largely to the lower benefit from favorable development on prior years’ reserves in 2015. The expense ratio improved to 63.3 in 2015, from 66.0 in 2014, due to shifts in mix during 2015 towards products with lower acquisition expense rates. In addition, the above-mentioned reinstatement premium contributed to a higher expense ratio in the prior year.

INVESTMENT INCOME AND REALIZED CAPITAL GAINS

Our investment portfolio generated net investment income of $26.9 million during the first six months of 2015, a decrease of 2.3 percent from that reported for the same period in 2014. The decrease in investment income was due to a lower yield environment during the first six months of 2015. On an after-tax basis, investment income decreased by 2.5 percent.

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	6/30/2015				12/31/2014
	Financial				Financial
(in thousands)	Stmt Value		%		StmtValue		%
Fixed income	$	1,537,365	77.8	%	$	1,495,087	76.1	%
Equity securities		391,152	19.8	%		410,642	20.9	%
Other invested assets		11,069	0.5	%		11,597	0.6	%
Cash and short-term investments		37,256	1.9	%		46,959	2.4	%
Total	$	1,976,842	100.0	%	$	1,964,285	100.0	%

Our current equity allocation represents 20 percent of our total investment portfolio.

We believe our overall asset allocation best meets our strategy to preserve capital for policyholders, provide sufficient income to support insurance operations, and to effectively grow book value over a long-term investment horizon.

Yields on our fixed income investments for the first six months of 2015 and 2014 were as follows:

	2015		2014
Pretax Yield
Taxable	3.41	%	3.67	%
Tax-Exempt	2.79	%	2.76	%
After-Tax Yield
Taxable	2.22	%	2.39	%
Tax-Exempt	2.64	%	2.61	%

The fixed income portfolio increased by $42.3 million in the first six months of 2015. The increase is due to allocating the majority of cash flows to the fixed income portfolio. This portfolio had a tax-adjusted total return on a mark-to-market basis of 0.7 percent. Average fixed income duration was 5.0 years at June 30, 2015, reflecting our current liability structure and sound capital position.

The equity portfolio decreased by $19.5 million during the first six months of 2015, to $391.2 million, and had a total return of -2.5 percent through June 30, 2015.

We recognized $18.1 million in realized gains in the first six months of 2015, compared to realized gains of $16.9 million in the same period of 2014. Realized gains were evenly distributed between the equity and fixed income portfolios. We did not record any realized losses associated with OTTI of securities during the first six months of 2015.

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The following table is used as part of our impairment analysis and illustrates certain industry-level measurements relative to our equity portfolio as of June 30, 2015, including fair value, cost basis and unrealized gains and losses.

	6/30/2015
	Cost				Unrealized						Unrealized
(in thousands)	Basis		Fair Value		Gains		Losses		Net		Gain/Loss% (1)
Consumer discretionary	$	11,984	$	28,552	$	16,568	$	—	$	16,568	138.3	%
Consumer staples		14,886		33,297		18,663		(252)		18,411	123.7	%
Energy		10,939		26,023		15,306		(222)		15,084	137.9	%
Financials		31,704		53,981		22,277		—		22,277	70.3	%
Healthcare		4,859		23,598		18,739		—		18,739	385.7	%
Industrials		17,512		35,145		17,633		—		17,633	100.7	%
Information technology		15,729		28,844		13,115		—		13,115	83.4	%
Materials		2,220		6,885		4,665		—		4,665	210.1	%
Telecommunications		4,393		11,809		7,416		—		7,416	168.8	%
Utilities		35,849		55,434		20,214		(629)		19,585	54.6	%
ETF		48,532		87,584		39,052		—		39,052	80.5	%
	$	198,607	$	391,152	$	193,648	$	(1,103)	$	192,545	96.9	%

(1) Calculated as the percentage of net unrealized gain (loss) to cost basis.

INCOME TAXES

Our effective tax rate for the first six months of 2015 was 32 percent compared to 31 percent for the same period in 2014. Effective rates are dependent upon components of pretax earnings and the related tax effects. The effective rate for the first six months of 2015 was higher due to an increase in underwriting income compared to 2014.

THREE MONTHS ENDED JUNE 30, 2015 COMPARED TO THREE MONTHS ENDED JUNE 30, 2014

Consolidated revenues, as displayed in the table that follows, totaled $190.6 million for the second quarter of 2015 compared to $193.0 million for the same period in 2014.

	For the Three-Month Periods
	Ended June 30,
	2015		2014
Consolidated revenues (in thousands)
Net premiums earned	$	172,339	$	168,604
Net investment income		13,431		13,982
Net realized investment gains		4,802		10,431
Total consolidated revenue	$	190,572	$	193,017

Consolidated revenue for the second quarter of 2015 decreased $2.4 million, or 1 percent, from the same period in 2014. Net premiums earned for the Group increased 2 percent for the quarter, driven by growth from our casualty and surety segments, which were up 8 percent and 15 percent, respectively. Due to the current yield environment, net investment income decreased 4 percent to $13.4 million. Net realized investment gains totaled $4.8 million in the second quarter of 2015, compared to $10.4 million in 2014.

Net after-tax earnings for the second quarter of 2015 totaled $37.2 million, $0.84 per diluted share, compared to $35.7 million, $0.82 per diluted share, for the same period last year. Results for both periods reflect positive underwriting results for the current accident year and also benefited from favorable development on prior years’ loss and catastrophe reserves. In the second quarter of 2015, favorable development on prior years’ loss and catastrophe reserves resulted in additional pretax earnings of $35.5 million. Partially offsetting this favorable development was $7.4 million in storm losses. Comparatively, in the second quarter of 2014 favorable development on prior years’ loss and catastrophe reserves resulted in additional pretax earnings of $27.5 million, partially offset by $8.0 million in losses from storms. Results for 2014 were also impacted by $1.3 million of reinsurance reinstatement premium related to unfavorable development on prior years’ surety reserves. Bonus and profit sharing-related expenses related to prior year reserve development and storm losses totaled $4.2 million in 2015, compared to $2.7 million in 2014.

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During the second quarter of 2015, equity in earnings of unconsolidated investees totaled $6.2 million. This amount includes $5.9 million from Maui Jim and $0.3 million from Prime. Comparatively, the second quarter of 2014 reflected $5.9 million of earnings, including $5.7 million from Maui Jim and $0.2 million from Prime. Refer to Note 6, Acquisitions, for more information regarding our recent investments in Prime.

Comprehensive earnings, which include net earnings plus other comprehensive earnings (primarily the change in unrealized gains/losses net of tax), totaled $12.3 million, $0.28 per diluted share, for the second quarter of 2015, compared to $55.7 million, $1.27 per diluted share, for the second quarter of 2014. Unrealized losses, net of tax, for the second quarter of 2015 were $24.9 million, compared to unrealized gains of $19.9 million for the same period in 2014. Unrealized losses in the second quarter of 2015 were primarily due to a decline in the fixed income portfolio.

RLI INSURANCE GROUP

As reflected in the table below, gross premiums written for the Group decreased 6 percent to $248.1 million for the second quarter of 2015. The overall decline was driven by our property segment, down 36 percent, due largely to reduced premium from our assumed crop business. Declines within the property segment extended beyond crop, however, as ongoing competition in the excess and surplus market continued to pressure premium production. Excluding the impact of crop, gross premiums written increased 7 percent from prior year, as our casualty and surety segments each improved, up 14 percent and 7 percent, respectively. From a pricing standpoint, trends have varied across our product portfolio, with certain products such as transportation, recreational vehicles and umbrella achieving rate increases. Pricing for catastrophe exposed coverages, however, continued to experience double digit declines during the quarter, consistent with recent trends for these lines. Net premiums written increased 1 percent in the quarter, outpacing results on a gross written basis due largely to cost savings realized during our 2015 reinsurance renewals. Excluding the impact of crop, net premiums written increased 9 percent. On a net premiums earned basis, premiums increased $3.7 million, or 2 percent, due to overall growth experienced in recent periods. Much of this growth is attributable to our casualty and surety segments, where net premiums earned were up 8 percent and 15 percent, respectively, from the prior year. Underwriting income for the Group totaled $34.8 million for the second quarter of 2015, compared to $26.6 million in 2014. Both periods reflect positive underwriting results for the current accident year and favorable reserve development on prior accident years. Favorable development on prior years’ loss and catastrophe reserves improved underwriting results by $30.1 million in 2015, compared to $22.3 million in the prior year. Storm losses impacted results for both periods as well, reducing underwriting earnings by $6.3 million and $6.8 million, respectively. The GAAP combined ratio totaled 79.8 in 2015, compared to 84.2 in 2014. The loss ratio decreased to 37.5 from 43.5, while the Group’s expense ratio increased to 42.3 from 40.7 due to changes in product mix.

	Forthe Three-Month Periods
	Ended June 30,
	2015		2014
Gross premiums written (in thousands)
Casualty	$	150,885	$	132,283
Property		64,842		101,735
Surety		32,372		30,152
Total	$	248,099	$	264,170
Underwriting income (in thousands)
Casualty	$	19,201	$	16,467
Property		4,828		2,293
Surety		10,807		7,809
Total	$	34,836	$	26,569
Combined ratio
Casualty		81.1		82.5
Property		88.3		95.3
Surety		62.9		69.3
Total		79.8		84.2

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Casualty

Gross premiums written for the casualty segment increased 14 percent to $150.9 million for the second quarter of 2015, compared to $132.3 million for the second quarter of 2014. Growth was experienced from most products within the segment, as expansion efforts, newer product initiatives and improved pricing on certain coverages all contributed to the improved top line. Our transportation product delivered excellent results in the quarter, posting gross premiums written of $34.0 million, up $8.0 million (31 percent). The growth in transportation resulted from increased opportunities to write new business and moderately improved pricing for these coverages. Our professional services group also contributed significantly to growth, as expansion efforts have driven a $3.3 million (18 percent) increase in gross premiums written. This business provides coverages to architects, engineers and other professional classes, and continues to post premium growth as we expand these offerings nationwide. Among other products which delivered solid results in the quarter was our P&C package business, which increased gross premiums written by 17 percent, as well as umbrella, up $4.2 million (13 percent), and general liability, up $1.9 million (9 percent). Assumed premium from our quota share reinsurance treaty with Prime’s two insurance subsidiaries also improved, up $1.2 million (48 percent) in the quarter. Growth from these products more than offset moderate declines from our executive products business, which decreased 10 percent, and our medical professional liability book, where prices have declined.

The casualty segment recorded underwriting income of $19.2 million in the second quarter of 2015, compared to $16.5 million for the same period last year. Underwriting results for both periods benefited from favorable development on prior years’ loss and catastrophe reserves. During the second quarter of 2015, we released reserves which improved the segment’s underwriting results by $21.1 million. Products with favorable development included general liability, umbrella, transportation, P&C package, medical professional liability and executive products. From an accident year standpoint, the majority of the favorable development occurred on more recent accident years (2008-2014). Losses from 2015 storms were minimal, impacting results by $0.1 million. Comparatively, 2014 results included favorable development on prior accident years’ loss reserves, primarily for general liability, umbrella, P&C package, transportation and professional services, which improved the segment’s underwriting results by $20.3 million. Results for 2014 were also impacted by storm losses, primarily related to our P&C package business, which reduced underwriting income for the segment by $1.9 million.

Overall, the combined ratio for the casualty segment was 81.1 for 2015 compared to 82.5 in 2014. The segment’s loss ratio was 45.4 in 2015 compared to 47.5 in 2014. The loss ratio decrease was due largely to the higher level of favorable development on prior years’ reserves and the lower amount of storm losses in 2015. The expense ratio for the casualty segment was 35.7 for the second quarter of 2015 compared to 35.0 for the same period in 2014.

Property

Gross premiums written for the Group’s property segment totaled $64.8 million for the second quarter of 2015, a decrease of $36.9 million, or 36 percent, from the same period last year. The majority of this decline relates to our crop reinsurance business, which declined $31.3 million (84 percent) in the quarter. As noted in previous filings, we expect reduced premiums as our crop reinsurance share was reduced for 2015 and will expire at the end of the current crop year due to the acquisition of the cedant.

In addition to the impact from crop, premium production in this segment continues to be pressured by increased competition and alternative capital, which have caused prices for excess and surplus property coverages to decline. As a result, premiums from our commercial property business declined in the quarter, with our fire and difference in conditions products down $2.7 million (11 percent) and $2.0 million (15 percent), respectively. Our recreational vehicles program also posted decreased premium in the second quarter, down 14 percent from the same period last year. The decline in this book was due to re-underwriting efforts initiated in the latter part of 2014 in response to heightened loss activity. While premiums were down for the year, double digit rate increases on retained business have been achieved as a result of these efforts. Premiums from marine declined slightly as well, following consecutive quarters of top line growth for this business. The re-underwriting of our marine business was completed in the second half of 2014. Partially offsetting these decreases, gross written premiums from our other property reinsurance program increased 11 percent and Hawaii homeowners improved 2 percent.

Underwriting income for the segment was $4.8 million for the second quarter of 2015, compared to $2.3 million for the same period last year. Results for both periods reflect positive underwriting income for the current accident year. Underwriting results for 2015 include favorable development on prior years’ loss and catastrophe reserves, primarily on marine business, which improved the segment’s underwriting results by $3.9 million. This favorable development partially offset losses recorded on 2015 storms, which reduced the segment’s underwriting results by $6.2 million. From a comparative standpoint, underwriting results for 2014 included unfavorable development on prior years’ loss and catastrophe reserves which impacted underwriting results by $1.4 million and $4.9 million in storm losses.

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Segment results for the second quarter of 2015 translated into a combined ratio of 88.3 compared to 95.3 for the same period last year. The segment’s loss ratio decreased to 44.6 in 2015 from 57.9 in 2014 due to increased favorable development on prior years’ loss and catastrophe reserves in 2015. From an expense standpoint, the segment’s expense ratio for the second quarter was 43.7 for 2015, compared to 37.4 in 2014. The increased expense ratio relates primarily to shifts in product mix, in particular with regard to crop, which carried a very low acquisition expense rate.

Surety

The surety segment recorded gross premiums written of $32.4 million for the second quarter of 2015, an increase of $2.2 million, or 7 percent, from the same period last year. Premium growth was achieved despite highly competitive conditions in this space, as new entrants and increased capacity continue to impact the market. Growth was led by commercial surety, which increased $1.2 million (17 percent) in the quarter, while miscellaneous surety also delivered solid results, up $1.2 million (11 percent). Gross premiums written from oil and gas surety and contract surety were relatively flat.

The surety segment recorded underwriting income of $10.8 million, compared to $7.8 million for the same period last year. Results for 2015 included favorable development on prior accident years’ loss reserves which improved the segment’s underwriting results by $5.8 million. From a comparative standpoint, 2014 results included favorable development on prior accident years’ loss reserves which improved the segment’s underwriting results by $4.9 million. Also impacting 2014 results were reinsurance reinstatement premiums related to unfavorable development in prior years’ surety reserves which reduced underwriting income by $1.1 million. Underwriting performance for both periods reflects positive current accident year results.

The combined ratio for the surety segment totaled 62.9 for the second quarter of 2015, compared to 69.3 for the same period in 2014. The segment’s loss ratio was -0.7 for 2015, compared to 0.8 for 2014. The loss ratio decrease was due largely to the higher benefit from favorable development on prior years’ reserves in 2015. The expense ratio improved to 63.6 for the second quarter of 2015, from 68.5 in the second quarter of 2014, due to shifts in mix towards products with lower acquisition expense rates. In addition, the above-mentioned reinstatement premium contributed to a higher expense ratio in the prior year.

INVESTMENT INCOME AND REALIZED CAPITAL GAINS

Our investment portfolio generated net investment income of $13.4 million during the second quarter of 2015, a decrease of 3.9 percent from that reported for the same period in 2014. The decrease in investment income was due to the current yield environment. On an after-tax basis, investment income decreased by 3.4 percent.

Our current equity allocation represents 20 percent of our total investment portfolio.

We believe our overall asset allocation best meets our strategy to preserve capital for policyholders, provide sufficient income to support insurance operations, and to effectively grow book value over a long-term investment horizon.

Yields on our fixed income investments for the second quarter of 2015 and 2014 were as follows:

	2Q 2015		2Q 2014
Pretax Yield
Taxable	3.39	%	3.67	%
Tax-Exempt	2.69	%	2.79	%
After-Tax Yield
Taxable	2.20	%	2.39	%
Tax-Exempt	2.55	%	2.64	%

We recognized $4.8 million in realized gains in the second quarter of 2015, compared to realized gains of $10.4 million in the same period of 2014. Realized gains were evenly distributed between the equity and fixed income portfolios. We did not record any realized losses associated with OTTI of securities during the second quarter of 2015.

INCOME TAXES

Our effective tax rate for the second quarter of 2015 was 32 percent compared to 31 percent for the same period in 2014. Effective rates are dependent upon components of pretax earnings and the related tax effects. The effective rate for the second quarter of 2015 was higher due to an increase in underwriting income compared to 2014.

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LIQUIDITY AND CAPITAL RESOURCES

We have three primary types of cash flows: (1) cash flows from operating activities, which consist mainly of cash generated by our underwriting operations and income earned on our investment portfolio, (2) cash flows from investing activities related to the purchase, sale and maturity of investments, and (3) cash flows from financing activities that impact our capital structure, such as shareholder dividend payments and changes in debt and shares outstanding.

The following table summarizes cash flows provided by (used in) our activities for the six-month periods ended June 30, 2015 and 2014:

	2015		2014
	(in thousands)
Operating cash flows	$	71,121	$	38,528
Investing cash flows	$	(62,234)	$	(38,827)
Financing cash flows	$	(12,420)	$	(11,936)
Total	$	(3,533)	$	(12,235)

Operating activities generated positive cash flows of $71.1 million in the first six months of 2015 compared to $38.5 million in the same period last year. The increase in operating cash flows was due largely to reduced levels of paid losses relative to the prior year.

We have $149.6 million in debt outstanding. On October 2, 2013, we completed a public debt offering, issuing $150.0 million in senior notes maturing September 15, 2023 (a 10-year maturity), and paying interest semi-annually at the rate of 4.875 percent per annum. The notes were issued at a discount resulting in proceeds, net of discount and commission, of $148.6 million. The estimated fair value for the senior note at June 30, 2015 was $154.5 million. The fair value of our debt is estimated based on the limited observable prices that reflect thinly traded securities.

As of June 30, 2015, we had cash, short-term investments and other investments maturing within one year of approximately $46.6 million and an additional $287.4 million maturing between one to five years. As of June 30, 2015, our short-term investments were held primarily in government/agency funds. All funds are NAIC-rated, AAA-rated and maintain average weighted maturities of less than 60 days. Holdings within each of these funds comply with regulatory limitations.

Whereas our strategy is to be fully invested at all times, short-term investments in excess of demand deposit balances are considered a component of investment activities, and thus are classified as investments in our consolidated balance sheets.

We also maintain a revolving line of credit with JP Morgan Chase Bank N.A., which permits us to borrow up to an aggregate principal amount of $40.0 million. This facility was entered into during the second quarter of 2014 and replaced the previous $25.0 million facility which expired on May 31, 2014. Under certain conditions, the line may be increased up to an aggregate principal amount of $65.0 million. The facility has a four-year term that expires on May 28, 2018. As of and during the six-month period ended June 30, 2015, no amounts were outstanding on this facility.

Additionally, during the third quarter of 2014, two of our insurance companies, RLI Ins. and Mt. Hawley, became members of the Federal Home Loan Bank of Chicago (FHLBC). Membership in the Federal Home Loan Bank System will provide both companies access to an additional source of liquidity via a secured lending facility. Our membership allows each insurance subsidiary to determine tenor and structure at the time of borrowing. As of and during the six-month period ended June 30, 2014, there were no outstanding borrowing amounts with FHLBC.

We believe that cash generated by operations, by investments and by cash available from financing activities will provide sufficient sources of liquidity to meet our anticipated needs over the next 12 to 24 months.

We have not had any liquidity issues affecting our operations as we have sufficient cash flow to support operations. In addition to our bank credit facility and FHLBC membership, our highly liquid investment portfolio provides an additional source of liquidity.

We maintain a diversified investment portfolio representing policyholder funds that have not yet been paid out as claims, as well as the capital we hold for our shareholders. As of June 30, 2015, our investment portfolio had a balance sheet value of $2.0 billion. Invested assets at June 30, 2015, have increased $12.6 million from December 31, 2014.

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As of June 30, 2015, our investment portfolio had the following asset allocation breakdown:

Portfolio Allocation
(in thousands)
	Costor		Fair		Unrealized		% of Total
Asset class	Amortized Cost		Value		Gain/(Loss)		Fair Value		Quality*
U.S. agency	$	13,499	$	13,644	$	145	0.7	%	AA+
Corporate		595,886		601,960		6,074	30.5	%	BBB+
Agency MBS		232,883		239,180		6,297	12.1	%	AA+
ABS/CMBS**		87,214		88,299		1,085	4.5	%	AAA
Non-U.S. govt. & agency		1,893		1,840		(53)	0.1	%	BBB+
U.S. government		30,281		30,400		119	1.5	%	AAA
Municipal		553,346		562,042		8,696	28.4	%	AA
Total Fixed Income	$	1,515,002	$	1,537,365	$	22,363	77.8	%	AA-
Equity	$	198,607	$	391,152	$	192,545	19.8	%
Other Invested Assets	$	11,069	$	11,069	$	—	0.5	%
Cash and Short-Term Investments	$	37,256	$	37,256	$	—	1.9	%
Total Portfolio	$	1,761,934	$	1,976,842	$	214,908	100.0	%

*Quality ratings provided by Moody’s and S&P

**Asset-backed and commercial mortgage-backed securities

Our investment portfolio does not have any exposure to derivatives.

As of June 30, 2015, our fixed income portfolio had the following rating distribution:

AAA	16.3	%
AA	44.3	%
A	21.8	%
BBB	10.9	%
BB	3.6	%
B	2.8	%
CCC	0.0	%
NR	0.3	%
Total	100.0	%

As of June 30, 2015, the duration of the fixed income portfolio was 5.0 years. Our fixed income portfolio remained well diversified, with 1,039 individual issues as of June 30, 2015.

Our investment portfolio has limited exposure to structured asset-backed securities (ABS). As of June 30, 2015, we had $36.8 million in ABS which are pools of assets collateralized by cash flows from several types of loans, including home equity, credit cards, autos and similar obligations. The majority of our asset-backed portfolio is comprised of rate reduction utility bonds.

As of June 30, 2015, we had $51.5 million in commercial mortgage backed securities (CMBS) and $239.2 million in residential mortgage backed securities backed by government sponsored enterprises (GSEs - Freddie Mac, Fannie Mae and Ginnie Mae). Excluding the GSE backed MBS, our exposure to ABS and CMBS was 4.5 percent of our investment portfolio at quarter end.

We had $602.0 million in corporate fixed income securities as of June 30, 2015. As of June 30, 2015, we had $70.8 million invested in a high yield credit strategy. This portfolio consists of floating rate bank loans and bonds that are below investment grade in credit quality and offer incremental yield over our core fixed income portfolio.

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We also maintain an allocation to municipal fixed income securities. As of June 30, 2015, we had $562.0 million in municipal securities. As of June 30, 2015, approximately 91 percent of our municipal bond portfolio maintains an ‘AA’ or better rating, while 99 percent of the municipal bond portfolio is rated ‘A’ or better.

At June 30, 2015, our equity portfolio had a fair value of $391.2 million and is also a source of liquidity. The securities within the equity portfolio remain primarily invested in large-cap issues with strong dividend performance. In the equity portfolio, the strategy remains one of value investing, with security selection taking precedence over market timing. We use a buy-and-hold strategy, minimizing both transactional costs and taxes.

As of June 30, 2015, our equity portfolio had a dividend yield of 2.9 percent compared to 2.1 percent for the S&P 500 index. Because of the corporate dividend-received-deduction applicable to our dividend income, we pay an effective tax rate of 14.2 percent on dividends, compared to 35.0 percent on taxable interest and 5.3 percent on municipal bond interest income. The equity portfolio is managed in a diversified and granular manner, with 82 individual names and no single stock exposure greater than 2 percent of the equity portfolio.

Other invested assets include an investment in a low income housing tax credit partnership as well as membership in the Federal Home Loan Bank Chicago. Our interest in a low income housing tax credit partnership had a balance of $9.5 million at June 30, 2015 compared to $9.8 million at December 31, 2014 and recognized a total tax benefit of $0.2 million during the second quarter of 2015 and $0.5 million during the six-month period ended June 30, 2015. Our investment in FHLBC stock totaled $1.6 million at June 30, 2015 and $1.8 million at December 31, 2014.

Our capital structure is comprised of equity and debt outstanding. As of June 30, 2015, our capital structure consisted of $149.6 million in 10-year maturity senior notes maturing in 2023 (debt) and $867.9 million of shareholders’ equity. Debt outstanding comprised 14.7 percent of total capital as of June 30, 2015. Interest and fees on debt obligations totaled $3.7 million during the first six months of 2015, the same amount as the previous year. We have incurred interest expense on debt at an average interest rate of 4.91 percent for the six-month periods ended June 30, 2015 and 2014.

We paid a quarterly cash dividend of $0.19 per share on June 19, 2015, a $0.01 increase over the prior quarter. We have paid dividends for 156 consecutive quarters and increased dividends in each of the last 40 years.

Our insurance subsidiaries are organized in a vertical structure with RLI Ins. as the first-level, or principal, insurance subsidiary of RLI Corp. At the holding company (RLI Corp.) level, we rely largely on dividends from our insurance company subsidiaries to meet our obligations for paying principal and interest on outstanding debt, corporate expenses and dividends to RLI Corp. shareholders. As discussed further below, dividend payments to RLI Corp. from our principal insurance subsidiary are restricted by state insurance laws as to the amount that may be paid without prior approval of the insurance regulatory authorities of Illinois. As a result, we may not be able to receive dividends from such subsidiary at times and in amounts necessary to pay desired dividends to RLI Corp. shareholders. On a GAAP basis, as of June 30, 2015, our holding company had $867.9 million in equity. This includes amounts related to the equity of our insurance subsidiaries, which is subject to regulatory restrictions under state insurance laws. The unrestricted portion of holding company net assets is comprised primarily of investments and cash, including $53.0 million in liquid assets, which approximates annual holding company expenditures. Unrestricted funds at the holding company are available to fund debt interest, general corporate obligations and dividend payments to our shareholders. If necessary, the holding company also has other potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include a revolving line of credit, as well as issuances of common stock and debt.

Ordinary dividends, which may be paid by our principal insurance subsidiary without prior regulatory approval, are subject to certain limitations based upon statutory income, surplus and earned surplus. The maximum ordinary dividend distribution from our principal insurance subsidiary in a rolling 12-month period is limited by Illinois law to the greater of 10 percent of RLI Ins. policyholder surplus, as of December 31 of the preceding year, or the net income of RLI Ins. for the 12-month period ending December 31 of the preceding year. Ordinary dividends are further restricted by the requirement that they be paid from earned surplus. Any dividend distribution in excess of the ordinary dividend limits is deemed extraordinary and requires prior approval from the Illinois Department of Insurance. In the first six months of 2015, RLI Ins. paid a total of $20.0 million in ordinary dividends to RLI Corp. In 2014, our principal insurance subsidiary paid ordinary dividends totaling $185.0 million to RLI Corp. No extraordinary dividends were paid during 2014. As of June 30, 2015, $58.4 million of the net assets of our principal insurance subsidiary are not restricted and could be distributed to RLI Corp. as ordinary dividends. Because the limitations are based upon a rolling 12-month period, the presence, amount and impact of these restrictions vary over time.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in equity prices, interest rates, foreign currency exchange rates and commodity prices. Historically, our primary market risks have been equity price risk associated with investments in equity securities and interest rate risk associated with investments in fixed maturities. We have limited exposure to both foreign currency risk and commodity risk.

Credit risk is the potential loss resulting from adverse changes in an issuer’s ability to repay its debt obligations. We monitor our portfolio to ensure that credit risk does not exceed prudent levels. We have consistently invested in high credit quality, investment grade securities. Our fixed maturity portfolio has an average rating of “AA-,” with 82 percent rated “A” or better by at least two nationally recognized rating organizations.

On an overall basis, our exposure to market risk has not significantly changed from that reported in our December 31, 2014 Annual Report on Form10-K.

ITEM 4. Controls and Procedures

We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was performed, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective, as of the end of the period covered by this report.

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objective, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We believe that our disclosure controls and procedures provide such reasonable assurance.

No changes were made to our internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PARTII - OTHER INFORMATION

Item 1.	Legal Proceedings – There were no material changes to report.
Item1A.	Risk Factors - There were no material changes to report.
Item2.	Unregistered Sales of Equity Securities and Use of Proceeds  -

Items 2(a)and (b)are not applicable.

Our current $100 million share repurchase program was implemented by our Board of Directors in May 2010. The repurchase program may be suspended or discontinued at any time without prior notice. During the first six months of 2015, no repurchases were made. We have not repurchased shares under this program since the third quarter of 2011. We have $87.5 million of remaining capacity from the repurchase program.

Item3.	Defaults Upon Senior Securities - Not Applicable.
Item4.	Mine Safety Disclosures - Not Applicable.
Item5.	Other Information - Not Applicable.

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Item6.	Exhibits
	Exhibit31.1 Certification Pursuant to Section302 of the Sarbanes-Oxley Act of 2002
	Exhibit31.2 Certification Pursuant to Section302 of the Sarbanes-Oxley Act of 2002
	Exhibit32.1 Certification Pursuant to 18 U.S.C. Section1350, asAdopted Pursuant to Section906 of the Sarbanes-Oxley Act of 2002
	Exhibit32.2 Certification Pursuant to 18 U.S.C. Section1350, asAdopted Pursuant to Section906 of the Sarbanes-Oxley Act of 2002
	Exhibit101 XBRL-Related Documents

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	RLI Corp.
	/s/Thomas L. Brown
	Thomas L. Brown
	Vice President, Chief Financial Officer
	(Principal Financial and Chief Accounting Officer)
Date: July 24, 2015

36

EX-31.1

Exhibit31.1

CERTIFICATION

Chief Executive Officer Certification pursuant to Section302 of the Sarbanes-Oxley Act of 2002

I, Jonathan E. Michael, certify that:

I have reviewed this quarterly report on Form10-Q of RLI Corp.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-15(e)and 15d-15(e))and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f)and 15d-15(f)) for the registrant and have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of  the registrant’s board of directors (or persons performing the equivalent functions):

(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:July 24, 2015

/s/ Jonathan E. Michael

Jonathan E. Michael

Chairman & CEO

EX-31.2

Exhibit31.2

CERTIFICATION

Chief Financial Officer Certification pursuant to Section302 of the Sarbanes-Oxley Act of 2002

I, Thomas L. Brown, certify that:

I have reviewed this quarterly report on Form10-Q of RLI Corp.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules13a-15(e)and 15d-15(e))and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f)and 15d-15(f)) for the registrant and have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of  the registrant’s board of directors (or persons performing the equivalent functions):

(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:July 24, 2015

/s/ Thomas L. Brown

Thomas L. Brown

VP, Chief Financial Officer

EX-32.1

Exhibit32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION1350,

AS ADOPTED PURSUANT TO

SECTION906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of RLI Corp. (the “Company”) on Form10-Q for the period ending June  30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”),I, Jonathan E. Michael, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a)or 15(d)of the Securities Exchange Act of 1934, and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Jonathan E. Michael

Jonathan E. Michael

Chairman & CEO

July 24, 2015

EX-32.2

Exhibit32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION1350,

AS ADOPTED PURSUANT TO

SECTION906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of RLI Corp. (the “Company”) on Form10-Q for the period ending June 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”),I, Thomas L. Brown, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a)or 15(d)of the Securities Exchange Act of 1934, and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Thomas L. Brown

Thomas L. Brown

VP, Chief Financial Officer

July 24, 2015

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INCOME TAXES

6 Months Ended

Jun. 30, 2015

INCOME TAXES

INCOME TAXES

4.  INCOME TAXES

Our effective tax rate for the three and six-month periods ended June 30, 2015 was 32 percent compared to 31 percent for the same periods in 2014. Effective rates are dependent upon components of pretax earnings and the related tax effects. The effective rate was higher for the three and six-month periods ended June 30, 2015 due to an increase in underwriting income compared to the same periods in 2014.

Income tax expense attributable to income from operations for the three and six-month periods ended June 30, 2015 and 2014 differed from the amounts computed by applying the U.S. federal tax rate of 35 percent to pretax income as a result of the following:

	For the Three-Month Periods Ended June 30,								For the Six-Month Periods Ended June 30,
	2015				2014				2015				2014
(in thousands)	Amount		%		Amount		%		Amount		%		Amount		%
Provision for income taxes at the statutory rate of 35%	$	19,127	35	%	$	18,348	35	%	$	34,707	35	%	$	33,045	35	%
Increase (reduction) in taxes resulting from:
Tax exempt interest income		(1,054)	(2)	%		(1,048)	(2)	%		(2,016)	(2)	%		(2,082)	(2)	%
Dividends received deduction		(535)	(1)	%		(533)	(1)	%		(1,112)	(1)	%		(1,131)	(1)	%
ESOP dividends paid deduction		(238)	—	%		(220)	(1)	%		(458)	—	%		(421)	(1)	%
Other items, net		165	—	%		151	—	%		259	—	%		309	—	%
Total tax expense	$	17,465	32	%	$	16,698	31	%	$	31,380	32	%	$	29,720	31	%

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STOCK BASED COMPENSATION (Details) - USD ($)	3 Months Ended				6 Months Ended		60 Months Ended
	Jun. 30, 2015	Mar. 31, 2015	Jun. 30, 2014	Mar. 31, 2014	Jun. 30, 2015	Jun. 30, 2014	May. 06, 2015	May. 06, 2010
Weighted Number of Options Outstanding
Outstanding options at the beginning of the period (in shares)		2,892,717		2,595,084	2,892,717	2,595,084
Options granted (in shares)					465,500	420,000
Options exercised (in shares)					(215,617)	(43,872)
Options canceled/forfeited (in shares)					(4,560)	(740)
Outstanding options at the end of the period (in shares)	3,138,040		2,970,472		3,138,040	2,970,472
Exercisable options at the end of the period (in shares)	1,441,660		1,300,292		1,441,660	1,300,292
Weighted Average Exercise Price
Outstanding options at the beginning of the period (in dollars per share)		$ 26.65		$ 26.04	$ 26.65	$ 26.04
Options granted (in dollars per share)					49.52	42.88
Options exercised (in dollars per share)					18.97	18.31
Options canceled/forfeited (in dollars per share)					31.87	16.51
Outstanding options at the end of the period (in dollars per share)	$ 30.56		$ 28.53		30.56	28.53
Exercisable options at the end of the period (in dollars per share)	$ 22.48		$ 22.02		$ 22.48	$ 22.02
Weighted Average Remaining Contractual Life
Weighted-average remaining contractual term of options outstanding					5 years 3 months 11 days	5 years 5 months 19 days
Weighted-average remaining contractual term of exercisable options					4 years 7 days	4 years 2 months 16 days
Aggregate Intrinsic Value
Options exercised (in dollars)					$ 6,620,000	$ 1,139,000
Outstanding options at the end of the period (in dollars)	$ 65,356,000		$ 51,232,000		65,356,000	51,232,000
Exercisable options at the end of the period (in dollars)	41,674,000		30,894,000		$ 41,674,000	$ 30,894,000
Weighted-average fair value of grants (in dollars per share)					$ 8.94	$ 7.76
Stock-based compensation expenses (in dollars)	1,100,000		1,200,000		$ 2,000,000	$ 2,100,000
Income tax benefit from stock-based compensation (in dollars)	400,000		$ 400,000		700,000	$ 700,000
Unrecognized stock-based compensation expense (in dollars)	$ 6,800,000				$ 6,800,000
Weighted average grant date assumptions and weighted average fair value
Weighted-average fair value of grants (in dollars per share)					$ 8.94	$ 7.76
Risk-free interest rates (as a percent)					1.54%	1.70%
Dividend yield (as a percent)					1.81%	1.94%
Expected volatility (as a percent)					22.89%	23.22%
Expected option life					5 years 2 months 16 days	5 years 2 months 5 days
Period for which annualized dividends is considered to calculate dividend yield					5 years
RLI Corp. Long-Term Incentive Plan (LTIP) and Omnibus Stock Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Award vesting period					5 years
Term of options					8 years
Age and period of service of the participant to be eligible for retirement					75 years
Omnibus Stock Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares authorized for grant								3,000,000
Weighted Number of Options Outstanding
Options granted (in shares)								2,458,059
RLI Corp. Long-Term Incentive Plan (2010 LTIP)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares authorized for grant	4,000,000				4,000,000
Weighted Number of Options Outstanding
Options granted (in shares)		53,500					2,878,000
RLI Corp. Long-Term Incentive Plan (2010 LTIP) | Outside director
Weighted average grant date assumptions and weighted average fair value
Restricted shares issued per recipient (in dollars)				$ 10,000
RLI Corp. Long-Term Incentive Plan (2015 LITP)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares authorized for grant	4,000,000				4,000,000
Weighted Number of Options Outstanding
Options granted (in shares)	412,000
Outside Directors' Stock Option Plan (the director's plan)
Aggregate Intrinsic Value
Stock-based compensation expenses (in dollars)				$ 100,000
Weighted average grant date assumptions and weighted average fair value
Restriction period				1 year
Restricted shares issued				2,097

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INCOME TAXES (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Reconciliation of income tax expense reported to amount computed by applying the U.S. federal tax rate
Provision for income taxes at the statutory rate of 35%	$ 19,127	$ 18,348	$ 34,707	$ 33,045
Tax-exempt interest income	(1,054)	(1,048)	(2,016)	(2,082)
Dividends received deduction	(535)	(533)	(1,112)	(1,131)
ESOP dividends paid deduction	(238)	(220)	(458)	(421)
Other items, net	165	151	259	309
Total tax expense	$ 17,465	$ 16,698	$ 31,380	$ 29,720
Reconciliation of income tax expense rate to the U.S. federal tax rate
U.S. federal tax rate (as a percent)	35.00%	35.00%	35.00%	35.00%
Effective rate reduction due to tax exempt interest income (as a percent)	(2.00%)	(2.00%)	(2.00%)	(2.00%)
Effective rate reduction due to dividend received (as a percent)	(1.00%)	(1.00%)	(1.00%)	(1.00%)
Effective rate reduction due to special dividend paid to ESOP (as a percent)		(1.00%)		(1.00%)
Effective tax rates (as a percent)	32.00%	31.00%	32.00%	31.00%

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OPERATING SEGMENT INFORMATION (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
REVENUES
Net premiums earned	$ 172,339	$ 168,604	$ 341,342	$ 329,736
Net investment income	13,431	13,982	26,926	27,564
Net realized gains	4,802	10,431	18,088	16,932
Consolidated revenue	190,572	193,017	386,356	374,232
NET EARNINGS (LOSSES)
Net underwriting income	34,836	26,569	52,474	49,101
Net investment income	13,431	13,982	26,926	27,564
Net realized gains	4,802	10,431	18,088	16,932
General corporate expense and interest on debt	(4,605)	(4,423)	(8,705)	(8,472)
Equity in earnings of unconsolidated investees	6,186	5,864	10,380	9,289
Earnings before income taxes	54,650	52,423	99,163	94,414
Income tax expense	17,465	16,698	31,380	29,720
Net earnings	37,185	35,725	67,783	64,694
Casualty segment
REVENUES
Net premiums earned	101,914	94,360	200,682	185,337
NET EARNINGS (LOSSES)
Net underwriting income	19,201	16,467	24,473	22,545
Property segment
REVENUES
Net premiums earned	41,281	48,791	83,399	92,109
NET EARNINGS (LOSSES)
Net underwriting income	4,828	2,293	13,004	11,971
Surety segment
REVENUES
Net premiums earned	29,144	25,453	57,261	52,290
NET EARNINGS (LOSSES)
Net underwriting income	$ 10,807	$ 7,809	$ 14,997	$ 14,585

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OPERATING SEGMENT INFORMATION Major Products (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Revenue by major product
Net premiums earned	$ 172,339	$ 168,604	$ 341,342	$ 329,736
Casualty segment
Revenue by major product
Net premiums earned	101,914	94,360	200,682	185,337
Casualty segment | Commercial and personal umbrella
Revenue by major product
Net premiums earned	26,012	25,024	51,309	49,780
Casualty segment | General liability
Revenue by major product
Net premiums earned	20,607	20,523	40,579	40,455
Casualty segment | Commercial transportation
Revenue by major product
Net premiums earned	15,117	15,005	29,798	29,516
Casualty segment | Professional services
Revenue by major product
Net premiums earned	17,641	13,839	34,721	26,700
Casualty segment | P&C package business
Revenue by major product
Net premiums earned	9,909	8,495	19,558	16,778
Casualty segment | Executive products
Revenue by major product
Net premiums earned	4,601	4,721	9,286	9,405
Casualty segment | Medical professional liability
Revenue by major product
Net premiums earned	3,032	3,724	6,136	7,424
Casualty segment | Other casualty
Revenue by major product
Net premiums earned	4,995	3,029	9,295	5,279
Property segment
Revenue by major product
Net premiums earned	41,281	48,791	83,399	92,109
Property segment | Commercial property
Revenue by major product
Net premiums earned	19,049	20,054	38,952	40,487
Property segment | Marine
Revenue by major product
Net premiums earned	10,984	12,962	22,901	25,163
Property segment | Crop reinsurance
Revenue by major product
Net premiums earned	1,222	5,683	1,687	6,869
Property segment | Specialty Personal
Revenue by major product
Net premiums earned	6,657	6,709	13,447	12,817
Property segment | Property reinsurance
Revenue by major product
Net premiums earned	3,342	3,387	6,359	6,748
Property segment | Other property
Revenue by major product
Net premiums earned	27		53	25
Net premiums earned		(4)
Surety segment
Revenue by major product
Net premiums earned	29,144	25,453	57,261	52,290
Surety segment | Miscellaneous
Revenue by major product
Net premiums earned	10,489	9,598	20,657	19,080
Surety segment | Contract
Revenue by major product
Net premiums earned	6,789	6,256	13,619	13,017
Surety segment | Commercial surety product
Revenue by major product
Net premiums earned	7,592	6,313	14,493	12,447
Surety segment | Oil and Gas
Revenue by major product
Net premiums earned	$ 4,274	$ 3,286	$ 8,492	$ 7,746

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FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2015

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

3.FAIR VALUE MEASUREMENTS

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Fair value is defined as the price in the principal market that would be received for an asset to facilitate an orderly transaction between market participants on the measurement date.

We determined the fair value of certain financial instruments based on their underlying characteristics and relevant transactions in the marketplace. GAAP guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance also describes three levels of inputs that may be used to measure fair value.

Financial assets are classified based upon the lowest level of significant input that is used to determine fair value. The following are the levels of the fair value hierarchy and a brief description of the type of valuation inputs that are used to establish each level:

Pricing Level 1 is applied to valuations based on readily available, unadjusted quoted prices in active markets for identical assets.

Pricing Level 2 is applied to valuations based upon quoted prices for similar assets in active markets, quoted prices for identical or similar assets in inactive markets; or valuations based on models where the significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities) or can be corroborated by observable market data.

Pricing Level 3 is applied to valuations that are derived from techniques in which one or more of the significant inputs are unobservable.

As a part of management’s process to determine fair value, we utilize widely recognized, third-party pricing sources to determine our fair values. We have obtained an understanding of the third-party pricing sources’ valuation methodologies and inputs. The following is a description of the valuation techniques used for financial assets that are measured at fair value, including the general classification of such assets pursuant to the fair value hierarchy.

Corporate, Agencies, Government and Municipal Bonds: The pricing vendor employs a multi-dimensional model which uses standard inputs including (listed in approximate order of priority for use) benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers and other reference data. The pricing vendor also monitors market indicators, as well as industry and economic events. All bonds valued using these techniques are classified as Level 2. All corporate, agency, government and municipal securities were deemed Level 2.

Mortgage-backed Securities (MBS)/Commercial Mortgage-backed Securities (CMBS) and Asset-backed Securities (ABS): The pricing vendor evaluation methodology includes principally interest rate movements and new issue data. Evaluation of the tranches (non-volatile, volatile or credit sensitivity) is based on the pricing vendors’ interpretation of accepted modeling and pricing conventions. This information is then used to determine the cash flows for each tranche, benchmark yields, prepayment assumptions and to incorporate collateral performance. To evaluate MBS and CMBS volatility, an option adjusted spread model is used in combination with models that simulate interest rate paths to determine market price information. This process allows the pricing vendor to obtain evaluations of a broad universe of securities in a way that reflects changes in yield curve, index rates, implied volatility, mortgage rates and recent trade activity. MBS/CMBS and ABS with corroborated, observable inputs are classified as Level 2. All of our MBS/CMBS and ABS are deemed Level 2.

Common Stock: Exchange traded equities have readily observable price levels and are classified as Level 1 (fair value based on quoted market prices). All of our common stock holdings are deemed Level 1.

For the Level 2 securities, as described above, we periodically conduct a review to assess the reasonableness of the fair values provided by our pricing services. Our review consists of a two pronged approach. First, we compare prices provided by our pricing services to those provided by an additional source. Second, we obtain prices from securities brokers and compare them to the prices provided by our pricing services. In both comparisons, when discrepancies are found, we compare our prices to actual reported trade data for like securities. Based on this assessment, we determined that the fair values of our Level 2 securities provided by our pricing services are reasonable.

For common stock, we receive prices from a nationally recognized pricing service. Prices are based on observable inputs in an active market and are therefore disclosed as Level 1. Based on this assessment, we determined that the fair values of our Level 1 securities provided by our pricing service are reasonable.

Due to the relatively short-term nature of cash, short-term investments, accounts receivable and accounts payable, their carrying amounts are reasonable estimates of fair value.

Assets measured at fair value in the accompanying unaudited condensed consolidated interim financial statements on a recurring basis are summarized below:

	As of June 30,  2015
	Fair Value Measurements Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Available-for-sale securities
U.S. government	$	—	$	30,400	$	—	$	30,400
U.S. agency		—		13,644		—		13,644
Non-U.S. govt. & agency		—		1,840		—		1,840
Agency MBS		—		239,180		—		239,180
ABS/CMBS*		—		88,299		—		88,299
Corporate		—		601,960		—		601,960
Municipal		—		562,042		—		562,042
Equity		391,152		—		—		391,152
Total available-for-sale securities	$	391,152	$	1,537,365	$	—	$	1,928,517

*Non-agency asset-backed and commercial mortgage-backed

	As of December 31,  2014
	Fair Value Measurements Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Available-for-sale securities
U.S. government	$	—	$	33,788	$	—	$	33,788
U.S. agency		—		6,747		—		6,747
Non-U.S. govt. & agency		—		10,665		—		10,665
Agency MBS		—		264,468		—		264,468
ABS/CMBS*		—		135,304		—		135,304
Corporate		—		562,690		—		562,690
Municipal		—		481,425		—		481,425
Equity		410,642		—		—		410,642
Total available-for-sale securities	$	410,642	$	1,495,087	$	—	$	1,905,729

* Non-agency asset-backed and commercial mortgage-backed

As noted in the above table, we did not have any assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period. Additionally, there were no securities transferred in or out of levels 1 or 2 during the six-month period ended June 30, 2015.

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ACQUISITION (Details) $ in Thousands			3 Months Ended		6 Months Ended
	Mar. 04, 2015 USD ($)	Feb. 05, 2014 USD ($)	Jun. 30, 2015 USD ($) state	Jun. 30, 2014 USD ($)	Jun. 30, 2015 USD ($) state subsidiary	Jun. 30, 2014 USD ($)
Business acquisition
Amount of investment					$ 1,711	$ 5,301
Equity in earnings of unconsolidated investees			$ 6,186	$ 5,864	$ 10,380	9,289
Prime Holdings Insurance Services, Inc. (Prime) [Member]
Business acquisition
Amount of investment	$ 1,700	$ 5,300
Equity ownership interest (as a percent)	27.00%	20.00%
Number of states in which entity operates | state			49		49
Equity in earnings of unconsolidated investees			$ 300	200	$ 800	300
Percentage of quota share reinsurance treaty, effective January 1, 2014					25.00%
Number of insurance subsidiaries | subsidiary					2
Reinsurance assumed			$ 3,600	$ 2,500	$ 6,700	$ 5,000

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Condensed Consolidated Statements of Earnings and Comprehensive Earnings - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Condensed Consolidated Statements of Earnings and Comprehensive Earnings
Net premiums earned	$ 172,339	$ 168,604	$ 341,342	$ 329,736
Net investment income	13,431	13,982	26,926	27,564
Net realized investment gains	4,802	10,431	18,088	16,932
Consolidated revenue	190,572	193,017	386,356	374,232
Losses and settlement expenses	64,549	73,345	145,410	144,361
Policy acquisition costs	59,487	55,156	118,460	110,207
Insurance operating expenses	13,467	13,534	24,998	26,067
Interest expense on debt	1,857	1,874	3,713	3,725
General corporate expenses	2,748	2,549	4,992	4,747
Total expenses	142,108	146,458	297,573	289,107
Equity in earnings of unconsolidated investees	6,186	5,864	10,380	9,289
Earnings before income taxes	54,650	52,423	99,163	94,414
Income tax expense	17,465	16,698	31,380	29,720
Net earnings	37,185	35,725	67,783	64,694
Other comprehensive earnings (loss), net of tax	(24,932)	19,934	(32,527)	37,671
Comprehensive earnings	$ 12,253	$ 55,659	$ 35,256	$ 102,365
Basic:
Net earnings per share (in dollars per share)	$ 0.86	$ 0.83	$ 1.57	$ 1.50
Comprehensive earnings per share (in dollars per share)	0.28	1.29	0.82	2.38
Diluted:
Net earnings per share (in dollars per share)	0.84	0.82	1.54	1.48
Comprehensive earnings per share (in dollars per share)	$ 0.28	$ 1.27	$ 0.80	$ 2.34
Weighted average number of common shares outstanding
Basic (in shares)	43,210	43,001	43,176	42,993
Diluted (in shares)	44,019	43,688	44,008	43,669
Cash dividends paid per common share (in dollars per share)	$ 0.19	$ 0.18	$ 0.37	$ 0.35

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2015

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A.  BASIS OF PRESENTATION

The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. As such, these unaudited condensed consolidated interim financial statements should be read in conjunction with our 2014 Annual Report on Form 10-K. Management believes that the disclosures are adequate to make the information presented not misleading, and all normal and recurring adjustments necessary to present fairly the financial position at June 30, 2015 and the results of operations of RLI Corp. and subsidiaries for all periods presented have been made. The results of operations for any interim period are not necessarily indicative of the operating results for a full year.

The preparation of the unaudited condensed consolidated interim financial statements requires management to make estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated interim financial statements and the reported amounts of revenue and expenses during the period. These estimates are inherently subject to change and actual results could differ significantly from these estimates.

B.  ADOPTED ACCOUNTING STANDARDS

No new accounting standards have been adopted as no issued updates would impact our financial statements.

C.  PROSPECTIVE ACCOUNTING STANDARDS

ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs

This ASU was issued to simplify the presentation of debt issuance costs by requiring them to be presented in the balance sheet as a direct deduction from the carrying amount of the related recognized debt liability, consistent with debt discounts. This ASU is effective for annual and interim reporting periods beginning after December 15, 2015. Early adoption is permitted. We have not early-adopted this ASU and do not believe adoption will have a material effect on our financial statements.

ASU 2015-09, Financial Services-Insurance (Topic 944): Disclosures about Short-Duration Contracts

This ASU was issued to enhance disclosures about an entity’s insurance liabilities, including the nature, amount, timing and uncertainty of cash flows related to those liabilities. The new guidance requires the disclosure of the following information related to unpaid claims and claim adjustment expenses:

a. Net incurred and paid claims development information by accident year for the number of years for which claims incurred typically remain outstanding, but need not exceed 10 years;

b. A reconciliation of incurred and paid claims development information to the aggregate carrying amount of the liability for unpaid claims and claim adjustment expenses, with separate disclosure of reinsurance recoverable on unpaid claims for each period presented in the statement of financial position;

c. For each accident year presented, the total of incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses;

d. For each accident year presented, quantitative information about claim frequency accompanied by a qualitative description of methodologies used for determining claim frequency information; and

e. For all claims, the average annual percentage payout of incurred claims by age.

This ASU is effective for annual reporting periods beginning after December 15, 2015 and for interim periods beginning after December 15, 2016. Early adoption is permitted. We have not early-adopted this ASU and while disclosures will be increased, we do not believe adoption will have a material effect on our financial statements.

D.  INTANGIBLE ASSETS

In accordance with GAAP guidelines, the amortization of goodwill and indefinite-lived intangible assets is not permitted. Goodwill and indefinite-lived intangible assets remain on the balance sheet and are tested for impairment on an annual basis, or earlier if there is reason to suspect that their values may have been diminished or impaired. Goodwill and intangible assets totaled $72.2 million at June 30, 2015.

Goodwill and intangible assets resulting from acquisitions completed prior to 2011 totaled $26.2 million and is attributable to our surety segment. Of this $26.2 million, $25.6 million relates to goodwill and $0.6million relates to an indefinite-lived intangible asset. Goodwill and intangible assets resulting from the Contractors Bonding and Insurance Company (CBIC) acquisition in April 2011 totaled $30.3 million. The CBIC-related assets include goodwill attributable to our casualty and surety segments of $5.3 million and $15.1 million, respectively, and an indefinite-lived intangible asset in the amount of $7.5 million, which relates to state insurance licenses. Annual impairment testing was performed on each of these goodwill and indefinite-lived intangible assets during the second quarter of 2015. Based upon these reviews, none of the assets were impaired. In addition, as of June 30, 2015, there were no triggering events that occurred that would suggest further review was necessary. Definite-lived intangible assets related to the CBIC acquisition totaled $2.4 million, net of amortization, as of June 30, 2015.

The remaining $15.7 million of goodwill and intangibles relates to our purchase of Rockbridge Underwriting Agency (Rockbridge) in November 2012. Of this amount, $12.4 million is recorded as goodwill attributable to our casualty segment. The remaining$3.3 million relates to definite-lived intangible assets, net of amortization, as of June 30, 2015. Impairment testing is performed on this goodwill asset in the fourth quarter of each year. There were no triggering events that occurred during the first half of 2015 that would suggest further review was necessary.

The aforementioned definite-lived intangible assets are amortized against future operating results based on their estimated useful lives. Amortization of intangible assets resulting from the acquisitions of CBIC and Rockbridge was $0.2 million for the second quarter of 2015 and $0.4 million for the six-month period ended June 30, 2015.

E.  EARNINGS PER SHARE

Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock or common stock equivalents were exercised or converted into common stock. When inclusion of common stock equivalents increases the earnings per share or reduces the loss per share, the effect on earnings is anti-dilutive. Under these circumstances, the diluted net earnings or net loss per share is computed excluding the common stock equivalents.

The following represents a reconciliation of the numerator and denominator of the basic and diluted EPS computations contained in the unaudited condensed consolidated interim financial statements.

	For the Three-Month Period					For the Three-Month Period
	Ended June 30,  2015					Ended June 30,  2014
	Income		Shares	Per Share		Income		Shares	Per Share
(in thousands, except per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Basic EPS
Income available to common shareholders	$	37,185	43,210	$	0.86	$	35,725	43,001	$	0.83
Effect of Dilutive Securities
Stock options		-	809				-	687
Diluted EPS
Income available to common shareholders	$	37,185	44,019	$	0.84	$	35,725	43,688	$	0.82
	For the Six-Month Period					For the Six-Month Period
	Ended June 30,  2015					Ended June 30,  2014
	Income		Shares	Per Share		Income		Shares	Per Share
(in thousands, except per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Basic EPS
Income available to common shareholders	$	67,783	43,176	$	1.57	$	64,694	42,993	$	1.50
Effect of Dilutive Securities
Stock options		-	832				-	676
Diluted EPS
Income available to common shareholders	$	67,783	44,008	$	1.54	$	64,694	43,669	$	1.48

F.  COMPREHENSIVE EARNINGS

Our comprehensive earnings include net earnings plus unrealized gains/losses on our available-for-sale investment securities, net of tax. In reporting comprehensive earnings on a net basis in the statement of earnings, we used the federal statutory tax rate of35 percent.

Unrealized losses for the first six months of 2015 were $32.5 million compared to unrealized gains of $37.7 million during the same period last year. Fixed income securities declined in market value during 2015 as interest rates rose and our conservative positioning in the equity portfolio underperformed the market over the same period. In 2014, both fixed income and equity securities experienced positive price movements.

The following table illustrates the changes in the balance of each component of accumulated other comprehensive earnings for each period presented in the unaudited condensed consolidated interim financial statements.

(in thousands)	For the Three-Month Periods				For the Six-Month Periods
	Ended June 30,				Ended June 30,
Unrealized Gains/Losses on Available-for-Sale Securities	2015		2014		2015		2014
Beginning balance	$	163,788	$	153,764	$	171,383	$	136,027
Other comprehensive earnings before reclassifications		(21,760)		26,714		(20,764)		48,674
Amounts reclassified from accumulated other comprehensive earnings		(3,172)		(6,780)		(11,763)		(11,003)
Net current-period other comprehensive earnings (loss)	$	(24,932)	$	19,934	$	(32,527)	$	37,671
Ending balance	$	138,856	$	173,698	$	138,856	$	173,698

The sale or other-than-temporary impairment of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive earnings to current period net earnings. The effects of reclassifications out of accumulated other comprehensive earnings by the respective line items of net earnings are presented in the following table.

	Amount Reclassified from Accumulated Other
(in thousands)	Comprehensive Earnings
	For the Three-Month				For the Six-Month
Component of Accumulated	Periods Ended June 30,				Periods Ended June 30,				Affected line item in the
Other Comprehensive Earnings	2015		2014		2015		2014		Statement of Earnings
Unrealized gains and losses on available-for-sale securities	$	4,880	$	10,431	$	18,097	$	16,928	Net realized investment gains
		-		-		-		-	Other-than-temporary impairment (OTTI) losses on investments
	$	4,880	$	10,431	$	18,097	$	16,928	Earnings before income taxes
		(1,708)		(3,651)		(6,334)		(5,925)	Income tax expense
	$	3,172	$	6,780	$	11,763	$	11,003	Net earnings

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Reclassification (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Amount Reclassified from Accumulated Other Comprehensive Earnings
Net realized investment gains	$ 4,802	$ 10,431	$ 18,088	$ 16,932
Earnings before income taxes	54,650	52,423	99,163	94,414
Income tax expense	(17,465)	(16,698)	(31,380)	(29,720)
Net earnings	37,185	35,725	67,783	64,694
Reclassifications out of accumulated other comprehensive earnings | Unrealized Gains and Losses on Available-for-Sale Securities
Amount Reclassified from Accumulated Other Comprehensive Earnings
Net realized investment gains	4,880	10,431	18,097	16,928
Earnings before income taxes	4,880	10,431	18,097	16,928
Income tax expense	(1,708)	(3,651)	(6,334)	(5,925)
Net earnings	$ 3,172	$ 6,780	$ 11,763	$ 11,003

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INVESTMENTS Unrealized Losses (Details) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Investment positions with unrealized losses
Unrealized losses relative to total invested assets (as a percent)	0.70%
Fair value
Less than 12 months	$ 525,036	$ 227,874
12 Months and Greater	34,089	106,657
Total Fair value	559,125	334,531
Cost or amortized Cost
Less than 12 months	538,523	233,338
12 months and greater	35,249	108,312
Total Cost or Amortized Cost	573,772	341,650
Unrealized Loss
Less than 12 months	(13,487)	(5,464)
12 Months and Greater	(1,160)	(1,655)
Total Unrealized Loss	(14,647)	(7,119)
Debt securities
Fair value
Less than 12 months	510,809	217,037
12 Months and Greater	34,089	106,657
Total Fair value	544,898	323,694
Cost or amortized Cost
Less than 12 months	523,193	221,503
12 months and greater	35,249	108,312
Total Cost or Amortized Cost	558,442	329,815
Unrealized Loss
Less than 12 months	(12,384)	(4,466)
12 Months and Greater	(1,160)	(1,655)
Total Unrealized Loss	$ (13,544)	(6,121)
Percent to Total	100.00%
Debt securities | NAIC Rating 1 | AAA/AA/A | Aaa/Aa/A
Fair value
Total Fair value	$ 414,108
Cost or amortized Cost
Total Cost or Amortized Cost	422,894
Unrealized Loss
Total Unrealized Loss	$ (8,786)
Percent to Total	64.90%
Debt securities | NAIC Rating 2 | BBB | Baa
Fair value
Total Fair value	$ 86,789
Cost or amortized Cost
Total Cost or Amortized Cost	90,037
Unrealized Loss
Total Unrealized Loss	$ (3,248)
Percent to Total	24.00%
Debt securities | NAIC Rating 3 | BB | Ba
Fair value
Total Fair value	$ 25,368
Cost or amortized Cost
Total Cost or Amortized Cost	26,131
Unrealized Loss
Total Unrealized Loss	$ (763)
Percent to Total	5.60%
Debt securities | NAIC Rating 4 | B
Fair value
Total Fair value	$ 18,512
Cost or amortized Cost
Total Cost or Amortized Cost	19,243
Unrealized Loss
Total Unrealized Loss	$ (731)
Percent to Total	5.40%
Debt securities | NAIC Rating 5 | CCC or lower
Fair value
Total Fair value	$ 121
Cost or amortized Cost
Total Cost or Amortized Cost	137
Unrealized Loss
Total Unrealized Loss	$ (16)
Percent to Total	0.10%
U.S. government
Fair value
Less than 12 months	$ 5,307	4,416
Total Fair value	5,307	4,416
Cost or amortized Cost
Less than 12 months	5,317	4,427
Total Cost or Amortized Cost	5,317	4,427
Unrealized Loss
Less than 12 months	(10)	(11)
Total Unrealized Loss	(10)	(11)
U.S. Agency
Fair value
Less than 12 months	7,026
Total Fair value	7,026
Cost or amortized Cost
Less than 12 months	7,110
Total Cost or Amortized Cost	7,110
Unrealized Loss
Less than 12 months	(84)
Total Unrealized Loss	(84)
Non-U.S. govt. & agency
Fair value
Less than 12 months	1,840
Total Fair value	1,840
Cost or amortized Cost
Less than 12 months	1,893
Total Cost or Amortized Cost	1,893
Unrealized Loss
Less than 12 months	(53)
Total Unrealized Loss	(53)
Agency MBS
Fair value
Less than 12 months	60,153	12,840
12 Months and Greater	20,107	61,534
Total Fair value	80,260	74,374
Cost or amortized Cost
Less than 12 months	60,974	12,947
12 months and greater	20,669	62,803
Total Cost or Amortized Cost	81,643	75,750
Unrealized Loss
Less than 12 months	(821)	(107)
12 Months and Greater	(562)	(1,269)
Total Unrealized Loss	(1,383)	(1,376)
ABS/CMBS
Fair value
Less than 12 months	31,524	63,782
12 Months and Greater	4,157	11,616
Total Fair value	35,681	75,398
Cost or amortized Cost
Less than 12 months	31,845	64,084
12 months and greater	4,180	11,725
Total Cost or Amortized Cost	36,025	75,809
Unrealized Loss
Less than 12 months	(321)	(302)
12 Months and Greater	(23)	(109)
Total Unrealized Loss	(344)	(411)
Corporate
Fair value
Less than 12 months	230,965	123,617
12 Months and Greater	9,825	14,488
Total Fair value	240,790	138,105
Cost or amortized Cost
Less than 12 months	239,010	127,634
12 months and greater	10,400	14,661
Total Cost or Amortized Cost	249,410	142,295
Unrealized Loss
Less than 12 months	(8,045)	(4,017)
12 Months and Greater	(575)	(173)
Total Unrealized Loss	(8,620)	(4,190)
Municipal
Fair value
Less than 12 months	173,994	12,382
12 Months and Greater		19,019
Total Fair value	173,994	31,401
Cost or amortized Cost
Less than 12 months	177,044	12,411
12 months and greater		19,123
Total Cost or Amortized Cost	177,044	31,534
Unrealized Loss
Less than 12 months	(3,050)	(29)
12 Months and Greater		(104)
Total Unrealized Loss	(3,050)	(133)
Equity securities
Fair value
Less than 12 months	14,227	10,837
Total Fair value	14,227	10,837
Cost or amortized Cost
Less than 12 months	15,330	11,835
Total Cost or Amortized Cost	15,330	11,835
Unrealized Loss
Less than 12 months	(1,103)	(998)
Total Unrealized Loss	$ (1,103)	$ (998)

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INVESTMENTS

6 Months Ended

Jun. 30, 2015

INVESTMENTS

INVESTMENTS

2.INVESTMENTS

Our investments include fixed income debt securities and common stock equity securities. As disclosed in our 2014 Annual Report on Form 10-K, we present all of our investments as available-for-sale, which are carried at fair value. During the fourth quarter of 2014, we sold our last remaining fixed income security that was classified as held-to-maturity. When available, we obtain quoted market prices to determine fair value for our investments. If a quoted market price is not available, fair value is estimated using a secondary pricing source or using quoted market prices of similar securities. We have no investment securities for which fair value is determined using Level 3 inputs as defined in note 3 to the unaudited condensed consolidated interim financial statements, “Fair Value Measurements.”

Available-for-Sale Securities

The amortized cost and fair value of available-for-sale securities at June 30, 2015 and December 31, 2014 were as follows:

Available-for-sale
(in thousands)
	6/30/2015
	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Asset Class	Cost		Gains		Losses		Value
U.S. government	$	30,281	$	129	$	(10)	$	30,400
U.S. agency		13,499		229		(84)		13,644
Non-U.S. govt. & agency		1,893		-		(53)		1,840
Agency MBS		232,883		7,680		(1,383)		239,180
ABS/CMBS*		87,214		1,429		(344)		88,299
Corporate		595,886		14,694		(8,620)		601,960
Municipal		553,346		11,746		(3,050)		562,042
Total Fixed Income	$	1,515,002	$	35,907	$	(13,544)	$	1,537,365
Equity	$	198,607	$	193,648	$	(1,103)	$	391,152

*Non-agency asset-backed and commercial mortgage-backed

Available-for-sale
(in thousands)
	12/31/2014
	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Asset Class	Cost		Gains		Losses		Value
U.S. government	$	33,668	$	131	$	(11)	$	33,788
U.S. agency		6,385		362		-		6,747
Non-U.S. govt. & agency		9,862		803		-		10,665
Agency MBS		256,443		9,401		(1,376)		264,468
ABS/CMBS*		133,894		1,821		(411)		135,304
Corporate		543,183		23,697		(4,190)		562,690
Municipal		464,769		16,789		(133)		481,425
Total Fixed Income	$	1,448,204	$	53,004	$	(6,121)	$	1,495,087
Equity	$	193,535	$	218,105	$	(998)	$	410,642

*Non-agency asset-backed and commercial mortgage-backed

The following table presents the amortized cost and fair value of available-for-sale debt securities by contractual maturity dates as of June 30, 2015:

	6/30/2015
Available-for-sale	Amortized		Fair
(in thousands)	Cost		Value
Due in one year or less	$	9,309	$	9,391
Due after one year through five years		259,490		265,403
Due after five years through 10 years		599,500		608,967
Due after 10 years		326,606		326,125
Mtge/ABS/CMBS*		320,097		327,479
Total available-for-sale	$	1,515,002	$	1,537,365

*Mortgage-backed, asset-backed and commercial mortgage-backed

Unrealized Losses

We conduct and document periodic reviews of all securities with unrealized losses to evaluate whether the impairment is other-than-temporary. The following tables are used as part of our impairment analysis and illustrate the total value of securities that were in an unrealized loss position as of June 30, 2015 and December 31, 2014. The tables segregate the securities based on type, noting the fair value, cost (or amortized cost) and unrealized loss on each category of investment as well as in total. The tables further classify the securities based on the length of time they have been in an unrealized loss position. As of June 30, 2015 unrealized losses, as shown in the following tables, were 0.7 percent of total invested assets. Unrealized losses increased in 2015, as interest rates increased during the first half of the year.

	June 30,  2015						December 31,  2014
(in thousands)	< 12 Mos.		12 Mos. &  Greater		Total		< 12 Mos.		12 Mos. &  Greater		Total
U.S. Government
Fair value	$	5,307	$	—	$	5,307	$	4,416	$	—	$	4,416
Cost or amortized cost		5,317		—		5,317		4,427		—		4,427
Unrealized Loss	$	(10)	$	—	$	(10)	$	(11)	$	—	$	(11)
U.S. Agency
Fair value	$	7,026	$	—	$	7,026	$	—	$	—	$	—
Cost or amortized cost		7,110		—		7,110		—		—		—
Unrealized Loss	$	(84)	$	—	$	(84)	$	—	$	—	$	—
Non-U.S. government
Fair value	$	1,840	$	—	$	1,840	$	—	$	—	$	—
Cost or amortized cost		1,893		—		1,893		—		—		—
Unrealized Loss	$	(53)	$	—	$	(53)	$	—	$	—	$	—
Agency MBS
Fair value	$	60,153	$	20,107	$	80,260	$	12,840	$	61,534	$	74,374
Cost or amortized cost		60,974		20,669		81,643		12,947		62,803		75,750
Unrealized Loss	$	(821)	$	(562)	$	(1,383)	$	(107)	$	(1,269)	$	(1,376)
ABS/CMBS*
Fair value	$	31,524	$	4,157	$	35,681	$	63,782	$	11,616	$	75,398
Cost or amortized cost		31,845		4,180		36,025		64,084		11,725		75,809
Unrealized Loss	$	(321)	$	(23)	$	(344)	$	(302)	$	(109)	$	(411)
Corporate
Fair value	$	230,965	$	9,825	$	240,790	$	123,617	$	14,488	$	138,105
Cost or amortized cost		239,010		10,400		249,410		127,634		14,661		142,295
Unrealized Loss	$	(8,045)	$	(575)	$	(8,620)	$	(4,017)	$	(173)	$	(4,190)
Municipal
Fair value	$	173,994	$	—	$	173,994	$	12,382	$	19,019	$	31,401
Cost or amortized cost		177,044		—		177,044		12,411		19,123		31,534
Unrealized Loss	$	(3,050)	$	—	$	(3,050)	$	(29)	$	(104)	$	(133)
Subtotal, fixed income
Fair value	$	510,809	$	34,089	$	544,898	$	217,037	$	106,657	$	323,694
Cost or amortized cost		523,193		35,249		558,442		221,503		108,312		329,815
Unrealized Loss	$	(12,384)	$	(1,160)	$	(13,544)	$	(4,466)	$	(1,655)	$	(6,121)
Equity securities
Fair value	$	14,227	$	—	$	14,227	$	10,837	$	—	$	10,837
Cost or amortized cost		15,330		—		15,330		11,835		—		11,835
Unrealized Loss	$	(1,103)	$	—	$	(1,103)	$	(998)	$	—	$	(998)
Total
Fair value	$	525,036	$	34,089	$	559,125	$	227,874	$	106,657	$	334,531
Cost or amortized cost		538,523		35,249		573,772		233,338		108,312		341,650
Unrealized Loss	$	(13,487)	$	(1,160)	$	(14,647)	$	(5,464)	$	(1,655)	$	(7,119)

* Non-agency asset-backed and commercial mortgage-backed

The following table shows the composition of the fixed income securities in unrealized loss positions at June 30, 2015 by the National Association of Insurance Commissioners (NAIC) rating and the generally equivalent Standard & Poor’s (S&P) and Moody’s ratings. The vast majority of the securities are rated by S&P and/or Moody’s.

	Equivalent	Equivalent	(dollars in thousands)
NAIC	S&P	Moody’s	Amortized				Unrealized		Percent
Rating	Rating	Rating	Cost		Fair Value		Loss		to Total
1	AAA/AA/A	Aaa/Aa/A	$	422,894	$	414,108	$	(8,786)	64.9	%
2	BBB	Baa		90,037		86,789		(3,248)	24.0	%
3	BB	Ba		26,131		25,368		(763)	5.6	%
4	B	B		19,243		18,512		(731)	5.4	%
5	CCC orlower	Caa or lower		137		121		(16)	0.1	%
6				—		—		—	—
		Total	$	558,442	$	544,898	$	(13,544)	100.0	%

Evaluating Investments for OTTI

The fixed income portfolio contained 355 securities in an unrealized loss position as of June 30, 2015. The $13.5 million in associated unrealized losses for these 355 securities represents 0.9 percent of the fixed income portfolio’s cost basis. Of these 355 securities, 33 have been in an unrealized loss position for 12 consecutive months or longer. All fixed income securities in the investment portfolio continue to pay the expected coupon payments under the contractual terms of the securities. Any credit-related impairment related to fixed income securities we do not plan to sell and for which we are not more likely than not to be required to sell is recognized in net earnings, with the non-credit related impairment recognized in comprehensive earnings. Based on our analysis, our fixed income portfolio is of high credit quality and we believe we will recover the amortized cost basis of our fixed income securities. We continually monitor the credit quality of our fixed income investments to assess if it is probable that we will receive our contractual or estimated cash flows in the form of principal and interest. There were no other-than-temporary impairment (OTTI) losses recognized in net earnings or other comprehensive earnings in the periods presented on the fixed income portfolio.

As of June 30, 2015, we held five common stock securities that were in an unrealized loss position. The unrealized loss on these securities was $1.1 million. Based on our analysis, we believe each security will recover in a reasonable period of time and we have the intent and ability to hold them until recovery. No equity securities have been in an unrealized loss position for 12 consecutive months or longer. There were no OTTI losses recognized in the periods presented on the equity portfolio.

Other Invested Assets

Other invested assets include an investment in a low income housing tax credit partnership, carried at amortized cost, and membership in the Federal Home Loan Bank Chicago (FHLBC), carried at cost. Our interest in a low income housing tax credit partnership had a balance of $9.5 million at June 30, 2015 compared to $9.8 million at December 31, 2014 and recognized a total tax benefit of $0.2 million during the second quarter of 2015 and $0.5 million during the six-month period ended June 30, 2015. Our investment in FHLBC stock totaled $1.6 million at June 30, 2015 compared to $1.8 million at December 31, 2014.

Cash and Short-term Investments

Cash consists of uninvested balances in bank accounts. We had a cash balance of $27.1million at the end of the second quarter of 2015, compared to $30.6 million at the end of 2014. Short-term investments are carried at cost, which approximates fair value. The balance at June 30, 2015 was $10.2 million compared to $16.3 million at December 31, 2014.

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Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Fixed income:
Available-for-sale, at fair value	$ 1,537,365	$ 1,495,087
Equity securities, at fair value	391,152	410,642
Short-term investments, at cost	10,169	16,339
Other invested assets	11,069	11,597
Cash	27,087	30,620
Total investments and cash	1,976,842	1,964,285
Accrued investment income	15,052	14,629
Premiums and reinsurance balances receivable	174,584	154,573
Ceded unearned premium	52,603	53,961
Reinsurance balances recoverable on unpaid losses	328,030	335,106
Deferred policy acquisition costs	71,575	65,123
Property and equipment	43,407	42,549
Investment in unconsolidated investees	71,179	60,046
Goodwill and intangibles	72,249	72,695
Other assets	9,664	12,575
TOTAL ASSETS	2,815,185	2,775,542
Liabilities:
Unpaid losses and settlement expenses	1,142,596	1,121,040
Unearned premiums	430,632	401,412
Reinsurance balances payable	36,915	38,013
Funds held	54,055	51,481
Income taxes - deferred	68,462	82,285
Bonds payable, long-term debt	149,647	149,625
Accrued expenses	40,303	63,148
Other liabilities	24,677	23,476
TOTAL LIABILITIES	1,947,287	1,930,480
Shareholders' Equity
Common stock ($1 par value, 100,000,000 shares authorized)(66,162,839 shares issued, 43,232,625 shares outstanding at 6/30/15)(66,032,929 shares issued, 43,102,715 shares outstanding at 12/31/14)	66,163	66,033
Paid-in capital	217,165	213,737
Accumulated other comprehensive earnings	138,856	171,383
Retained earnings	838,713	786,908
Deferred compensation	14,042	13,769
Less: Treasury shares at cost (22,930,214 shares at 6/30/15 and 12/31/14)	(407,041)	(406,768)
TOTAL SHAREHOLDERS’ EQUITY	867,898	845,062
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$ 2,815,185	$ 2,775,542

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INCOME TAXES (Tables)

6 Months Ended

Jun. 30, 2015

INCOME TAXES

Schedule of reconciliation of income tax expense attributable to income from operations with amounts computed by applying the U.S. federal tax rate to pretax income from continuing operations

	For the Three-Month Periods Ended June 30,								For the Six-Month Periods Ended June 30,
	2015				2014				2015				2014
(in thousands)	Amount		%		Amount		%		Amount		%		Amount		%
Provision for income taxes at the statutory rate of 35%	$	19,127	35	%	$	18,348	35	%	$	34,707	35	%	$	33,045	35	%
Increase (reduction) in taxes resulting from:
Tax exempt interest income		(1,054)	(2)	%		(1,048)	(2)	%		(2,016)	(2)	%		(2,082)	(2)	%
Dividends received deduction		(535)	(1)	%		(533)	(1)	%		(1,112)	(1)	%		(1,131)	(1)	%
ESOP dividends paid deduction		(238)	—	%		(220)	(1)	%		(458)	—	%		(421)	(1)	%
Other items, net		165	—	%		151	—	%		259	—	%		309	—	%
Total tax expense	$	17,465	32	%	$	16,698	31	%	$	31,380	32	%	$	29,720	31	%

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2015	Jul. 13, 2015
Document and Entity Information
Entity Registrant Name	RLI CORP
Entity Central Index Key	0000084246
Document Type	10-Q
Document Period End Date	Jun. 30, 2015
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		43,232,625
Document Fiscal Year Focus	2015
Document Fiscal Period Focus	Q2

XML

STOCK BASED COMPENSATION (Tables)

6 Months Ended

Jun. 30, 2015

STOCK BASED COMPENSATION

Schedule of stock option activity

				Weighted
		Weighted		Average	Aggregate
	Number of	Average		Remaining	Intrinsic
	Options	Exercise		Contractual	Value
	Outstanding	Price		Life	(in 000’s)
Outstanding options at January 1, 2015	2,892,717	$	26.65
Options granted	465,500	$	49.52
Options exercised	(215,617)	$	18.97		$	6,620
Options canceled/forfeited	(4,560)	$	31.87
Outstanding options at June 30, 2015	3,138,040	$	30.56	5.28	$	65,356
Exercisable options at June 30, 2015	1,441,660	$	22.48	4.02	$	41,674
				Weighted
		Weighted		Average	Aggregate
	Number of	Average		Remaining	Intrinsic
	Options	Exercise		Contractual	Value
	Outstanding	Price		Life	(in 000’s)
Outstanding options at January 1, 2014	2,595,084	$	26.04
Options granted	420,000	$	42.88
Options exercised	(43,872)	$	18.31		$	1,139
Options canceled/forfeited	(740)	$	16.51
Outstanding options at June 30, 2014	2,970,472	$	28.53	5.47	$	51,232
Exercisable options at June 30, 2014	1,300,292	$	22.02	4.21	$	30,894

Schedule of stock option assumptions for fair value estimate

	2015			2014
Weighted-average fair value of grants	$	8.94		$	7.76
Risk-free interest rates		1.54	%		1.70	%
Dividend yield		1.81	%		1.94	%
Expected volatility		22.89	%		23.22	%
Expected option life		5.21	years		5.18	years

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Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares	Jun. 30, 2015	Dec. 31, 2014
Condensed Consolidated Balance Sheets
Common stock, par value (in dollars per share)	$ 1	$ 1
Common stock, shares authorized (in shares)	100,000,000	100,000,000
Common stock, shares issued (in shares)	66,162,839	66,032,929
Common stock, shares outstanding (in shares)	43,232,625	43,102,715
Treasury stock, shares (in shares)	22,930,214	22,930,214

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ACQUISITION

6 Months Ended

Jun. 30, 2015

ACQUISITIONS

ACQUISITIONS

7.  ACQUISITION

On February 5, 2014, we invested $5.3 million for a 20 percent equity ownership interest in Prime Holdings Insurance Services, Inc. (Prime), an Illinois domiciled insurance carrier based in Salt Lake City, Utah. On March 4, 2015 we invested an additional $1.7 million, increasing our total equity ownership to 27 percent. Prime’s primary subsidiary, Prime Insurance Company, is a privately-held excess and surplus lines insurance company operating in 49 states and territories through a network of wholesale brokers and specializing in hard-to-place risks. The investment in Prime is reflected on our balance sheet as an investment in unconsolidated investee. Under the equity method of accounting we recognize our proportionate share of Prime’s income as equity in earnings of unconsolidated investees. Our share of Prime’s earnings amounted to $0.3 million in the second quarter of 2015 and $0.8 million in the first six months of 2015. Comparatively, our share of Prime’s earnings amounted to $0.2 million in the second quarter of 2014 and $0.3 million in the first six months of 2014.

Additionally, we entered into a 25 percent quota share reinsurance treaty with Prime’s two insurance subsidiaries, effective January 1, 2014. We assumed gross premiums of $3.6 million in the second quarter of 2015 and $6.7 million in the first six months of 2015 related to this quota share agreement. Comparatively, we assumed gross premiums of $2.5million in the second quarter of 2014 and $5.0 million in the first six months of 2014 related to this quota share agreement.

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OPERATING SEGMENT INFORMATION

6 Months Ended

Jun. 30, 2015

OPERATING SEGMENT INFORMATION

OPERATING SEGMENT INFORMATION

6.  OPERATING SEGMENT INFORMATION

Selected information by operating segment is presented in the table below. Additionally, the table reconciles segment totals to total earnings and total revenues.

	For the Three-Month Periods				For the Six-Month Periods
REVENUES	Ended June 30,				Ended June 30,
(in thousands)	2015		2014		2015		2014
Net premiums earned:
Casualty	$	101,914	$	94,360	$	200,682	$	185,337
Property		41,281		48,791		83,399		92,109
Surety		29,144		25,453		57,261		52,290
Segment totals before income taxes	$	172,339	$	168,604	$	341,342	$	329,736
Net investment income		13,431		13,982		26,926		27,564
Net realized gains		4,802		10,431		18,088		16,932
Total consolidated revenue	$	190,572	$	193,017	$	386,356	$	374,232
NET EARNINGS
(in thousands)	2015		2014		2015		2014
Casualty	$	19,201	$	16,467	$	24,473	$	22,545
Property		4,828		2,293		13,004		11,971
Surety		10,807		7,809		14,997		14,585
Net underwriting income	$	34,836	$	26,569	$	52,474	$	49,101
Net investment income		13,431		13,982		26,926		27,564
Net realized gains		4,802		10,431		18,088		16,932
General corporate expense and interest on debt		(4,605)		(4,423)		(8,705)		(8,472)
Equity in earnings of unconsolidated investees		6,186		5,864		10,380		9,289
Total earnings before income taxes	$	54,650	$	52,423	$	99,163	$	94,414
Income tax expense		17,465		16,698		31,380		29,720
Total net earnings	$	37,185	$	35,725	$	67,783	$	64,694

The following table further summarizes revenues by major product type within each operating segment:

	For the Three-Month Periods				For the Six-Month Periods
NET PREMIUMS EARNED	Ended June 30,				Ended June 30,
(in thousands)	2015		2014		2015		2014
Casualty
Commercial and personal umbrella	$	26,012	$	25,024	$	51,309	$	49,780
General liability		20,607		20,523		40,579		40,455
Professional services		17,641		13,839		34,721		26,700
Commercial transportation		15,117		15,005		29,798		29,516
P&C package business		9,909		8,495		19,558		16,778
Executive products		4,601		4,721		9,286		9,405
Medical professional liability		3,032		3,724		6,136		7,424
Other casualty		4,995		3,029		9,295		5,279
Total	$	101,914	$	94,360	$	200,682	$	185,337
Property
Commercial property	$	19,049	$	20,054	$	38,952	$	40,487
Marine		10,984		12,962		22,901		25,163
Specialty personal		6,657		6,709		13,447		12,817
Property reinsurance		3,342		3,387		6,359		6,748
Crop reinsurance		1,222		5,683		1,687		6,869
Other property		27		(4)		53		25
Total	$	41,281	$	48,791	$	83,399	$	92,109
Surety
Miscellaneous	$	10,489	$	9,598	$	20,657	$	19,080
Commercial		7,592		6,313		14,493		12,447
Contract		6,789		6,256		13,619		13,017
Oil and Gas		4,274		3,286		8,492		7,746
Total	$	29,144	$	25,453	$	57,261	$	52,290
Grand Total	$	172,339	$	168,604	$	341,342	$	329,736

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INVESTMENTS (Details) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Amortized Cost
Due in one year or less	$ 9,309
Due after one year through five years	259,490
Due after five years through 10 years	599,500
Due after 10 years	326,606
Total amoritzed cost	1,515,002
Fair Value
Due in one year or less	9,391
Due after one year through five years	265,403
Due after five years through 10 years	608,967
Due after 10 years	326,125
Total fair value	1,537,365	$ 1,495,087
Fair value measured on recurring basis | Significant Unobservable Inputs (Level 3)
INVESTMENTS
Total assets at fair value	0
Debt securities
Available-for-sale
Available-for-sale Securities, Amortized Cost Basis, Total	1,515,002	1,448,204
Gross Unrealized Gains	35,907	53,004
Gross Unrealized Losses	(13,544)	(6,121)
Fair Value	1,537,365	1,495,087
U.S. government
Available-for-sale
Available-for-sale Securities, Amortized Cost Basis, Total	30,281	33,668
Gross Unrealized Gains	129	131
Gross Unrealized Losses	(10)	(11)
Fair Value	30,400	33,788
U.S. Agency
Available-for-sale
Available-for-sale Securities, Amortized Cost Basis, Total	13,499	6,385
Gross Unrealized Gains	229	362
Gross Unrealized Losses	(84)
Fair Value	13,644	6,747
Non-U.S. govt. & agency
Available-for-sale
Available-for-sale Securities, Amortized Cost Basis, Total	1,893	9,862
Gross Unrealized Gains		803
Gross Unrealized Losses	(53)
Fair Value	1,840	10,665
ABS/CMBS
Available-for-sale
Available-for-sale Securities, Amortized Cost Basis, Total	87,214	133,894
Gross Unrealized Gains	1,429	1,821
Gross Unrealized Losses	(344)	(411)
Fair Value	88,299	135,304
Agency MBS
Available-for-sale
Available-for-sale Securities, Amortized Cost Basis, Total	232,883	256,443
Gross Unrealized Gains	7,680	9,401
Gross Unrealized Losses	(1,383)	(1,376)
Fair Value	239,180	264,468
Corporate
Available-for-sale
Available-for-sale Securities, Amortized Cost Basis, Total	595,886	543,183
Gross Unrealized Gains	14,694	23,697
Gross Unrealized Losses	(8,620)	(4,190)
Fair Value	601,960	562,690
Municipal
Available-for-sale
Available-for-sale Securities, Amortized Cost Basis, Total	553,346	464,769
Gross Unrealized Gains	11,746	16,789
Gross Unrealized Losses	(3,050)	(133)
Fair Value	562,042	481,425
Mtge/ABS/CMBS
Available-for-sale
Available-for-sale Securities, Amortized Cost Basis, Total	320,097
Fair Value	327,479
Equity securities
Available-for-sale
Available-for-sale Securities, Amortized Cost Basis, Total	198,607	193,535
Gross Unrealized Gains	193,648	218,105
Gross Unrealized Losses	(1,103)	(998)
Fair Value	$ 391,152	$ 410,642

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OPERATING SEGMENT INFORMATION (Tables)

6 Months Ended

Jun. 30, 2015

OPERATING SEGMENT INFORMATION

Schedule of revenues and net earnings by segment

	For the Three-Month Periods				For the Six-Month Periods
REVENUES	Ended June 30,				Ended June 30,
(in thousands)	2015		2014		2015		2014
Net premiums earned:
Casualty	$	101,914	$	94,360	$	200,682	$	185,337
Property		41,281		48,791		83,399		92,109
Surety		29,144		25,453		57,261		52,290
Segment totals before income taxes	$	172,339	$	168,604	$	341,342	$	329,736
Net investment income		13,431		13,982		26,926		27,564
Net realized gains		4,802		10,431		18,088		16,932
Total consolidated revenue	$	190,572	$	193,017	$	386,356	$	374,232
NET EARNINGS
(in thousands)	2015		2014		2015		2014
Casualty	$	19,201	$	16,467	$	24,473	$	22,545
Property		4,828		2,293		13,004		11,971
Surety		10,807		7,809		14,997		14,585
Net underwriting income	$	34,836	$	26,569	$	52,474	$	49,101
Net investment income		13,431		13,982		26,926		27,564
Net realized gains		4,802		10,431		18,088		16,932
General corporate expense and interest on debt		(4,605)		(4,423)		(8,705)		(8,472)
Equity in earnings of unconsolidated investees		6,186		5,864		10,380		9,289
Total earnings before income taxes	$	54,650	$	52,423	$	99,163	$	94,414
Income tax expense		17,465		16,698		31,380		29,720
Total net earnings	$	37,185	$	35,725	$	67,783	$	64,694

Schedule of net premiums earned by major product type

	For the Three-Month Periods				For the Six-Month Periods
NET PREMIUMS EARNED	Ended June 30,				Ended June 30,
(in thousands)	2015		2014		2015		2014
Casualty
Commercial and personal umbrella	$	26,012	$	25,024	$	51,309	$	49,780
General liability		20,607		20,523		40,579		40,455
Professional services		17,641		13,839		34,721		26,700
Commercial transportation		15,117		15,005		29,798		29,516
P&C package business		9,909		8,495		19,558		16,778
Executive products		4,601		4,721		9,286		9,405
Medical professional liability		3,032		3,724		6,136		7,424
Other casualty		4,995		3,029		9,295		5,279
Total	$	101,914	$	94,360	$	200,682	$	185,337
Property
Commercial property	$	19,049	$	20,054	$	38,952	$	40,487
Marine		10,984		12,962		22,901		25,163
Specialty personal		6,657		6,709		13,447		12,817
Property reinsurance		3,342		3,387		6,359		6,748
Crop reinsurance		1,222		5,683		1,687		6,869
Other property		27		(4)		53		25
Total	$	41,281	$	48,791	$	83,399	$	92,109
Surety
Miscellaneous	$	10,489	$	9,598	$	20,657	$	19,080
Commercial		7,592		6,313		14,493		12,447
Contract		6,789		6,256		13,619		13,017
Oil and Gas		4,274		3,286		8,492		7,746
Total	$	29,144	$	25,453	$	57,261	$	52,290
Grand Total	$	172,339	$	168,604	$	341,342	$	329,736

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INVESTMENTS (Tables)

6 Months Ended

Jun. 30, 2015

INVESTMENTS

Schedule of securities in an unrealized loss position segregated by type and length of time in an unrealized loss position

	June 30,  2015						December 31,  2014
(in thousands)	< 12 Mos.		12 Mos. &  Greater		Total		< 12 Mos.		12 Mos. &  Greater		Total
U.S. Government
Fair value	$	5,307	$	—	$	5,307	$	4,416	$	—	$	4,416
Cost or amortized cost		5,317		—		5,317		4,427		—		4,427
Unrealized Loss	$	(10)	$	—	$	(10)	$	(11)	$	—	$	(11)
U.S. Agency
Fair value	$	7,026	$	—	$	7,026	$	—	$	—	$	—
Cost or amortized cost		7,110		—		7,110		—		—		—
Unrealized Loss	$	(84)	$	—	$	(84)	$	—	$	—	$	—
Non-U.S. government
Fair value	$	1,840	$	—	$	1,840	$	—	$	—	$	—
Cost or amortized cost		1,893		—		1,893		—		—		—
Unrealized Loss	$	(53)	$	—	$	(53)	$	—	$	—	$	—
Agency MBS
Fair value	$	60,153	$	20,107	$	80,260	$	12,840	$	61,534	$	74,374
Cost or amortized cost		60,974		20,669		81,643		12,947		62,803		75,750
Unrealized Loss	$	(821)	$	(562)	$	(1,383)	$	(107)	$	(1,269)	$	(1,376)
ABS/CMBS*
Fair value	$	31,524	$	4,157	$	35,681	$	63,782	$	11,616	$	75,398
Cost or amortized cost		31,845		4,180		36,025		64,084		11,725		75,809
Unrealized Loss	$	(321)	$	(23)	$	(344)	$	(302)	$	(109)	$	(411)
Corporate
Fair value	$	230,965	$	9,825	$	240,790	$	123,617	$	14,488	$	138,105
Cost or amortized cost		239,010		10,400		249,410		127,634		14,661		142,295
Unrealized Loss	$	(8,045)	$	(575)	$	(8,620)	$	(4,017)	$	(173)	$	(4,190)
Municipal
Fair value	$	173,994	$	—	$	173,994	$	12,382	$	19,019	$	31,401
Cost or amortized cost		177,044		—		177,044		12,411		19,123		31,534
Unrealized Loss	$	(3,050)	$	—	$	(3,050)	$	(29)	$	(104)	$	(133)
Subtotal, fixed income
Fair value	$	510,809	$	34,089	$	544,898	$	217,037	$	106,657	$	323,694
Cost or amortized cost		523,193		35,249		558,442		221,503		108,312		329,815
Unrealized Loss	$	(12,384)	$	(1,160)	$	(13,544)	$	(4,466)	$	(1,655)	$	(6,121)
Equity securities
Fair value	$	14,227	$	—	$	14,227	$	10,837	$	—	$	10,837
Cost or amortized cost		15,330		—		15,330		11,835		—		11,835
Unrealized Loss	$	(1,103)	$	—	$	(1,103)	$	(998)	$	—	$	(998)
Total
Fair value	$	525,036	$	34,089	$	559,125	$	227,874	$	106,657	$	334,531
Cost or amortized cost		538,523		35,249		573,772		233,338		108,312		341,650
Unrealized Loss	$	(13,487)	$	(1,160)	$	(14,647)	$	(5,464)	$	(1,655)	$	(7,119)

* Non-agency asset-backed and commercial mortgage-backed

Schedule of credit quality indicators for investments in unrealized loss positions

	Equivalent	Equivalent	(dollars in thousands)
NAIC	S&P	Moody’s	Amortized				Unrealized		Percent
Rating	Rating	Rating	Cost		Fair Value		Loss		to Total
1	AAA/AA/A	Aaa/Aa/A	$	422,894	$	414,108	$	(8,786)	64.9	%
2	BBB	Baa		90,037		86,789		(3,248)	24.0	%
3	BB	Ba		26,131		25,368		(763)	5.6	%
4	B	B		19,243		18,512		(731)	5.4	%
5	CCC orlower	Caa or lower		137		121		(16)	0.1	%
6				—		—		—	—
		Total	$	558,442	$	544,898	$	(13,544)	100.0	%

Available for sale securities

INVESTMENTS

Schedule of amortized cost and fair value of available-for-sale securities

Available-for-sale
(in thousands)
	6/30/2015
	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Asset Class	Cost		Gains		Losses		Value
U.S. government	$	30,281	$	129	$	(10)	$	30,400
U.S. agency		13,499		229		(84)		13,644
Non-U.S. govt. & agency		1,893		-		(53)		1,840
Agency MBS		232,883		7,680		(1,383)		239,180
ABS/CMBS*		87,214		1,429		(344)		88,299
Corporate		595,886		14,694		(8,620)		601,960
Municipal		553,346		11,746		(3,050)		562,042
Total Fixed Income	$	1,515,002	$	35,907	$	(13,544)	$	1,537,365
Equity	$	198,607	$	193,648	$	(1,103)	$	391,152

*Non-agency asset-backed and commercial mortgage-backed

Available-for-sale
(in thousands)
	12/31/2014
	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Asset Class	Cost		Gains		Losses		Value
U.S. government	$	33,668	$	131	$	(11)	$	33,788
U.S. agency		6,385		362		-		6,747
Non-U.S. govt. & agency		9,862		803		-		10,665
Agency MBS		256,443		9,401		(1,376)		264,468
ABS/CMBS*		133,894		1,821		(411)		135,304
Corporate		543,183		23,697		(4,190)		562,690
Municipal		464,769		16,789		(133)		481,425
Total Fixed Income	$	1,448,204	$	53,004	$	(6,121)	$	1,495,087
Equity	$	193,535	$	218,105	$	(998)	$	410,642

*Non-agency asset-backed and commercial mortgage-backed

Schedule of contractual maturity of securities

	6/30/2015
Available-for-sale	Amortized		Fair
(in thousands)	Cost		Value
Due in one year or less	$	9,309	$	9,391
Due after one year through five years		259,490		265,403
Due after five years through 10 years		599,500		608,967
Due after 10 years		326,606		326,125
Mtge/ABS/CMBS*		320,097		327,479
Total available-for-sale	$	1,515,002	$	1,537,365

*Mortgage-backed, asset-backed and commercial mortgage-backed

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

6 Months Ended

Jun. 30, 2015

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

A.  BASIS OF PRESENTATION

The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. As such, these unaudited condensed consolidated interim financial statements should be read in conjunction with our 2014 Annual Report on Form 10-K. Management believes that the disclosures are adequate to make the information presented not misleading, and all normal and recurring adjustments necessary to present fairly the financial position at June 30, 2015 and the results of operations of RLI Corp. and subsidiaries for all periods presented have been made. The results of operations for any interim period are not necessarily indicative of the operating results for a full year.

The preparation of the unaudited condensed consolidated interim financial statements requires management to make estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated interim financial statements and the reported amounts of revenue and expenses during the period. These estimates are inherently subject to change and actual results could differ significantly from these estimates.

INTANGIBLE ASSETS

D.  INTANGIBLE ASSETS

In accordance with GAAP guidelines, the amortization of goodwill and indefinite-lived intangible assets is not permitted. Goodwill and indefinite-lived intangible assets remain on the balance sheet and are tested for impairment on an annual basis, or earlier if there is reason to suspect that their values may have been diminished or impaired. Goodwill and intangible assets totaled $72.2 million at June 30, 2015.

Goodwill and intangible assets resulting from acquisitions completed prior to 2011 totaled $26.2 million and is attributable to our surety segment. Of this $26.2 million, $25.6 million relates to goodwill and $0.6million relates to an indefinite-lived intangible asset. Goodwill and intangible assets resulting from the Contractors Bonding and Insurance Company (CBIC) acquisition in April 2011 totaled $30.3 million. The CBIC-related assets include goodwill attributable to our casualty and surety segments of $5.3 million and $15.1 million, respectively, and an indefinite-lived intangible asset in the amount of $7.5 million, which relates to state insurance licenses. Annual impairment testing was performed on each of these goodwill and indefinite-lived intangible assets during the second quarter of 2015. Based upon these reviews, none of the assets were impaired. In addition, as of June 30, 2015, there were no triggering events that occurred that would suggest further review was necessary. Definite-lived intangible assets related to the CBIC acquisition totaled $2.4 million, net of amortization, as of June 30, 2015.

The remaining $15.7 million of goodwill and intangibles relates to our purchase of Rockbridge Underwriting Agency (Rockbridge) in November 2012. Of this amount, $12.4 million is recorded as goodwill attributable to our casualty segment. The remaining$3.3 million relates to definite-lived intangible assets, net of amortization, as of June 30, 2015. Impairment testing is performed on this goodwill asset in the fourth quarter of each year. There were no triggering events that occurred during the first half of 2015 that would suggest further review was necessary.

The aforementioned definite-lived intangible assets are amortized against future operating results based on their estimated useful lives. Amortization of intangible assets resulting from the acquisitions of CBIC and Rockbridge was $0.2 million for the second quarter of 2015 and $0.4 million for the six-month period ended June 30, 2015.

EARNINGS PER SHARE

E.  EARNINGS PER SHARE

Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock or common stock equivalents were exercised or converted into common stock. When inclusion of common stock equivalents increases the earnings per share or reduces the loss per share, the effect on earnings is anti-dilutive. Under these circumstances, the diluted net earnings or net loss per share is computed excluding the common stock equivalents.

The following represents a reconciliation of the numerator and denominator of the basic and diluted EPS computations contained in the unaudited condensed consolidated interim financial statements.

	For the Three-Month Period					For the Three-Month Period
	Ended June 30,  2015					Ended June 30,  2014
	Income		Shares	Per Share		Income		Shares	Per Share
(in thousands, except per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Basic EPS
Income available to common shareholders	$	37,185	43,210	$	0.86	$	35,725	43,001	$	0.83
Effect of Dilutive Securities
Stock options		-	809				-	687
Diluted EPS
Income available to common shareholders	$	37,185	44,019	$	0.84	$	35,725	43,688	$	0.82
	For the Six-Month Period					For the Six-Month Period
	Ended June 30,  2015					Ended June 30,  2014
	Income		Shares	Per Share		Income		Shares	Per Share
(in thousands, except per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Basic EPS
Income available to common shareholders	$	67,783	43,176	$	1.57	$	64,694	42,993	$	1.50
Effect of Dilutive Securities
Stock options		-	832				-	676
Diluted EPS
Income available to common shareholders	$	67,783	44,008	$	1.54	$	64,694	43,669	$	1.48

COMPREHENSIVE EARNINGS

F.  COMPREHENSIVE EARNINGS

Our comprehensive earnings include net earnings plus unrealized gains/losses on our available-for-sale investment securities, net of tax. In reporting comprehensive earnings on a net basis in the statement of earnings, we used the federal statutory tax rate of35 percent.

Unrealized losses for the first six months of 2015 were $32.5 million compared to unrealized gains of $37.7 million during the same period last year. Fixed income securities declined in market value during 2015 as interest rates rose and our conservative positioning in the equity portfolio underperformed the market over the same period. In 2014, both fixed income and equity securities experienced positive price movements.

The following table illustrates the changes in the balance of each component of accumulated other comprehensive earnings for each period presented in the unaudited condensed consolidated interim financial statements.

(in thousands)	For the Three-Month Periods				For the Six-Month Periods
	Ended June 30,				Ended June 30,
Unrealized Gains/Losses on Available-for-Sale Securities	2015		2014		2015		2014
Beginning balance	$	163,788	$	153,764	$	171,383	$	136,027
Other comprehensive earnings before reclassifications		(21,760)		26,714		(20,764)		48,674
Amounts reclassified from accumulated other comprehensive earnings		(3,172)		(6,780)		(11,763)		(11,003)
Net current-period other comprehensive earnings (loss)	$	(24,932)	$	19,934	$	(32,527)	$	37,671
Ending balance	$	138,856	$	173,698	$	138,856	$	173,698

The sale or other-than-temporary impairment of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive earnings to current period net earnings. The effects of reclassifications out of accumulated other comprehensive earnings by the respective line items of net earnings are presented in the following table.

	Amount Reclassified from Accumulated Other
(in thousands)	Comprehensive Earnings
	For the Three-Month				For the Six-Month
Component of Accumulated	Periods Ended June 30,				Periods Ended June 30,				Affected line item in the
Other Comprehensive Earnings	2015		2014		2015		2014		Statement of Earnings
Unrealized gains and losses on available-for-sale securities	$	4,880	$	10,431	$	18,097	$	16,928	Net realized investment gains
		-		-		-		-	Other-than-temporary impairment (OTTI) losses on investments
	$	4,880	$	10,431	$	18,097	$	16,928	Earnings before income taxes
		(1,708)		(3,651)		(6,334)		(5,925)	Income tax expense
	$	3,172	$	6,780	$	11,763	$	11,003	Net earnings

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

6 Months Ended

Jun. 30, 2015

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Schedule of reconciliation of numerator and denominator of the basic and diluted earnings per share computations

	For the Three-Month Period					For the Three-Month Period
	Ended June 30,  2015					Ended June 30,  2014
	Income		Shares	Per Share		Income		Shares	Per Share
(in thousands, except per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Basic EPS
Income available to common shareholders	$	37,185	43,210	$	0.86	$	35,725	43,001	$	0.83
Effect of Dilutive Securities
Stock options		-	809				-	687
Diluted EPS
Income available to common shareholders	$	37,185	44,019	$	0.84	$	35,725	43,688	$	0.82
	For the Six-Month Period					For the Six-Month Period
	Ended June 30,  2015					Ended June 30,  2014
	Income		Shares	Per Share		Income		Shares	Per Share
(in thousands, except per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Basic EPS
Income available to common shareholders	$	67,783	43,176	$	1.57	$	64,694	42,993	$	1.50
Effect of Dilutive Securities
Stock options		-	832				-	676
Diluted EPS
Income available to common shareholders	$	67,783	44,008	$	1.54	$	64,694	43,669	$	1.48

Schedule of changes in the balance of each component of accumulated other comprehensive earnings

(in thousands)	For the Three-Month Periods				For the Six-Month Periods
	Ended June 30,				Ended June 30,
Unrealized Gains/Losses on Available-for-Sale Securities	2015		2014		2015		2014
Beginning balance	$	163,788	$	153,764	$	171,383	$	136,027
Other comprehensive earnings before reclassifications		(21,760)		26,714		(20,764)		48,674
Amounts reclassified from accumulated other comprehensive earnings		(3,172)		(6,780)		(11,763)		(11,003)
Net current-period other comprehensive earnings (loss)	$	(24,932)	$	19,934	$	(32,527)	$	37,671
Ending balance	$	138,856	$	173,698	$	138,856	$	173,698

Schedule of effects of reclassifications out of accumulated other comprehensive earnings

	Amount Reclassified from Accumulated Other
(in thousands)	Comprehensive Earnings
	For the Three-Month				For the Six-Month
Component of Accumulated	Periods Ended June 30,				Periods Ended June 30,				Affected line item in the
Other Comprehensive Earnings	2015		2014		2015		2014		Statement of Earnings
Unrealized gains and losses on available-for-sale securities	$	4,880	$	10,431	$	18,097	$	16,928	Net realized investment gains
		-		-		-		-	Other-than-temporary impairment (OTTI) losses on investments
	$	4,880	$	10,431	$	18,097	$	16,928	Earnings before income taxes
		(1,708)		(3,651)		(6,334)		(5,925)	Income tax expense
	$	3,172	$	6,780	$	11,763	$	11,003	Net earnings

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FAIR VALUE MEASUREMENTS (Tables)

6 Months Ended

Jun. 30, 2015

Accounting Changes and Error Corrections [Abstract]

Schedule of assets measured at fair value on recurring basis

	As of June 30,  2015
	Fair Value Measurements Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Available-for-sale securities
U.S. government	$	—	$	30,400	$	—	$	30,400
U.S. agency		—		13,644		—		13,644
Non-U.S. govt. & agency		—		1,840		—		1,840
Agency MBS		—		239,180		—		239,180
ABS/CMBS*		—		88,299		—		88,299
Corporate		—		601,960		—		601,960
Municipal		—		562,042		—		562,042
Equity		391,152		—		—		391,152
Total available-for-sale securities	$	391,152	$	1,537,365	$	—	$	1,928,517

*Non-agency asset-backed and commercial mortgage-backed

	As of December 31,  2014
	Fair Value Measurements Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Available-for-sale securities
U.S. government	$	—	$	33,788	$	—	$	33,788
U.S. agency		—		6,747		—		6,747
Non-U.S. govt. & agency		—		10,665		—		10,665
Agency MBS		—		264,468		—		264,468
ABS/CMBS*		—		135,304		—		135,304
Corporate		—		562,690		—		562,690
Municipal		—		481,425		—		481,425
Equity		410,642		—		—		410,642
Total available-for-sale securities	$	410,642	$	1,495,087	$	—	$	1,905,729

* Non-agency asset-backed and commercial mortgage-backed

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Unrealized Gains and Losses (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Changes in the balance of each component of accumulated other comprehensive earnings
Tax rate used (as a percent)	35.00%	35.00%	35.00%	35.00%
Changes in the balance of each component of accumulated other comprehensive earnings
Beginning balance			$ 171,383
Net current-period other comprehensive earnings (loss)	$ (24,932)	$ 19,934	(32,527)	$ 37,671
Ending balance	138,856		138,856
Unrealized Gains and Losses on Available-for-Sale Securities
Changes in the balance of each component of accumulated other comprehensive earnings
Beginning balance	163,788	153,764	171,383	136,027
Other comprehensive earnings before reclassifications	(21,760)	26,714	(20,764)	48,674
Amounts reclassified from accumulated other comprehensive earnings	(3,172)	(6,780)	(11,763)	(11,003)
Net current-period other comprehensive earnings (loss)	(24,932)	19,934	(32,527)	37,671
Ending balance	$ 138,856	$ 173,698	$ 138,856	$ 173,698

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INVESTMENTS Debt and Short-term Investments (Details) - USD ($) $ in Thousands	3 Months Ended	6 Months Ended
	Jun. 30, 2015	Jun. 30, 2015	Dec. 31, 2014	Jun. 30, 2014	Dec. 31, 2013
Other invested assets
Other Investments	$ 11,069	$ 11,069	$ 11,597
Total tax benefit on investments in housing tax credit partnership	200	500
Investment in FHLBC	1,600	1,600	1,800
Cash and Short-term Investments
Cash	27,087	27,087	30,620	$ 27,234	$ 39,469
Short-term investments, at cost which approximates fair value	10,169	10,169	16,339
Investment In Low Income Housing Tax Credit Partnership Net Of Amortization Member
Other invested assets
Other Investments	$ 9,500	$ 9,500	$ 9,800

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Consolidated Statements of Cash Flows - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014
Condensed Consolidated Statements of Cash Flows
Net cash provided by operating activities	$ 71,121	$ 38,528
Cash Flows from Investing Activities
Investments purchased	(393,382)	(311,402)
Investments sold	250,602	217,403
Investments called or matured	81,680	49,932
Net change in short-term investments	3,866	15,462
Net property and equipment purchased	(3,289)	(4,921)
Investment in equity method investee	(1,711)	(5,301)
Net cash used in investing activities	(62,234)	(38,827)
Cash Flows from Financing Activities
Cash dividends paid	(15,978)	(15,046)
Stock plan share issuance	1,779	2,760
Excess tax benefit from exercise of stock options	1,779	350
Net cash used in financing activities	(12,420)	(11,936)
Net decrease in cash	(3,533)	(12,235)
Cash at the beginning of the period	30,620	39,469
Cash at June 30	$ 27,087	$ 27,234

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STOCK BASED COMPENSATION

6 Months Ended

Jun. 30, 2015

STOCK BASED COMPENSATION

STOCK BASED COMPENSATION

5.  STOCK BASED COMPENSATION

Our RLI Corp. Omnibus Stock Plan (omnibus plan) was in place from 2005 to 2010. The omnibus plan provided for equity-based compensation, including stock options, up to a maximum of 3,000,000 shares of common stock (subject to adjustment for changes in our capitalization and other events). Between 2005 and 2010, we granted 2,458,059 stock options under this plan, including incentive stock options (ISOs), which were adjusted as part of the special dividends paid in 2014 and prior years. The omnibus plan was replaced in 2010.

In 2010, our shareholders approved the RLI Corp. Long-Term Incentive Plan (2010 LTIP), which provides for equity-based compensation and replaced the omnibus plan. In conjunction with the adoption of the 2010 LTIP, effective May 6, 2010, options were no longer granted under the omnibus plan. The 2010 LTIP provided for equity-based compensation, including stock options, up to a maximum of 4,000,000 shares of common stock (subject to adjustment for changes in our capitalization and other events). Between 2010 and 2015, we granted 2,878,000 stock options under the 2010 LTIP, including 53,500 in the first quarter of 2015. The 2010 LTIP was replaced in the second quarter of 2015.

During the second quarter of 2015, our shareholders approved the 2015 RLI Corp. Long-Term Incentive Plan (2015 LTIP), which provides for equity-based compensation and replaced the 2010 LTIP. In conjunction with the adoption of the 2015 LTIP, effective May 7, 2015, options were no longer granted under the 2010 LTIP. Awards under the 2015 LTIP may be in the form of restricted stock, stock options (non-qualified only), stock appreciation rights, performance units as well as other stock-based awards. Eligibility under the 2015 LTIP is limited to employees or directors of the company or any affiliate. The granting of awards under the 2015 LTIP is solely at the discretion of the board of directors. The maximum number of shares of common stock available for distribution under the 2015 LTIP is 4,000,000 shares (subject to adjustment for changes in our capitalization and other events). Thus far in 2015, we have granted 412,000 stock options under the 2015 LTIP.

Under the 2015 LTIP, as under the 2010 LTIP and omnibus plan, we grant stock options for shares with an exercise price equal to the fair market value of the shares at the date of grant (subject to adjustments for changes in our capitalization, special dividends and other events as set forth in such plans). Options generally vest and become exercisable ratably over a five-year period and expire eight years after grant.

For most participants, the requisite service period and vesting period will be the same. For participants who are retirement eligible, defined by the plan as those individuals whose age and years of service equals 75, the requisite service period is deemed to be met and options are immediately expensed on the date of grant. For participants who will become retirement eligible during the vesting period, the requisite service period over which expense is recognized is the period between the grant date and the attainment of retirement eligibility. Shares issued upon option exercise are newly issued shares.

The following tables summarize option activity for the periods ended June 30, 2015 and 2014:

				Weighted
		Weighted		Average	Aggregate
	Number of	Average		Remaining	Intrinsic
	Options	Exercise		Contractual	Value
	Outstanding	Price		Life	(in 000’s)
Outstanding options at January 1, 2015	2,892,717	$	26.65
Options granted	465,500	$	49.52
Options exercised	(215,617)	$	18.97		$	6,620
Options canceled/forfeited	(4,560)	$	31.87
Outstanding options at June 30, 2015	3,138,040	$	30.56	5.28	$	65,356
Exercisable options at June 30, 2015	1,441,660	$	22.48	4.02	$	41,674
				Weighted
		Weighted		Average	Aggregate
	Number of	Average		Remaining	Intrinsic
	Options	Exercise		Contractual	Value
	Outstanding	Price		Life	(in 000’s)
Outstanding options at January 1, 2014	2,595,084	$	26.04
Options granted	420,000	$	42.88
Options exercised	(43,872)	$	18.31		$	1,139
Options canceled/forfeited	(740)	$	16.51
Outstanding options at June 30, 2014	2,970,472	$	28.53	5.47	$	51,232
Exercisable options at June 30, 2014	1,300,292	$	22.02	4.21	$	30,894

The majority of our stock options are granted annually at our regular board meeting in May. In addition, options are approved at the May meeting for quarterly grants to certain retirement eligible employees. Since stock option grants to retirement eligible employees are fully expensed when issued, the approach allows for a more even expense distribution throughout the year.

Thus far in 2015, 465,500 stock options were granted with a weighted average exercise price of $49.52 and a weighted average fair value of $8.94. We recognized $1.1 million of expense in the second quarter of 2015 and $2.0 million in the first six months of 2015 related to options vesting. Since options granted under 2010 LTIP and 2015 LTIP are non-qualified, we recorded a tax benefit of $0.4 million in the second quarter of 2015 and $0.7 million in the first six months of 2015 related to this compensation expense. Total unrecognized compensation expense relating to outstanding and unvested options was $6.8 million, which will be recognized over the remainder of the vesting period. Comparatively, we recognized $1.2 million of expense in the second quarter of 2014 and $2.1 million of expense in the first six months of 2014. We recorded a tax benefit of $0.4 million in the second quarter of 2014 and $0.7 million in the first six months of 2014 related to this compensation expense.

The fair value of options was estimated using a Black-Scholes based option pricing model with the following weighted average grant-date assumptions and weighted average fair values as of June 30:

	2015			2014
Weighted-average fair value of grants	$	8.94		$	7.76
Risk-free interest rates		1.54	%		1.70	%
Dividend yield		1.81	%		1.94	%
Expected volatility		22.89	%		23.22	%
Expected option life		5.21	years		5.18	years

The risk-free rate was determined based on U.S. treasury yields that most closely approximated the option’s expected life. The dividend yield was calculated based on the average annualized ordinary dividends paid during the most recent five-year period. It excluded the special dividends paid in the fourth quarters of 2014 and prior years. The expected volatility was calculated based on the median of the rolling volatilities for the expected life of the options. The expected option life was determined based on historical exercise behavior and the assumption that all outstanding options will be exercised at the midpoint of the current date and remaining contractual term, adjusted for the demographics of the current year’s grant.

During the first quarter of 2014, each outside director received $10,000 worth of restricted common shares from the 2010 LTIP as part of director compensation. The shares were directly owned by each director on the date of issuance and included a one-year restriction on the sale or transfer of such shares. In the first quarter of 2014, we issued a total of 2,097 restricted shares and recognized $0.1 million of compensation expense. This restricted share program was terminated in 2014.

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FAIR VALUE MEASUREMENTS (Details) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Transfers in (out of) level 1	$ 0
Transfers in (out of) level 2	0
Quoted Prices in Active Markets for Identical Assets (Level 1) | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	391,152	$ 410,642
Significant Other Observable Inputs (Level 2) | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	1,537,365	1,495,087
Significant Unobservable Inputs (Level 3) | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total assets at fair value	0
Total | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	1,928,517	1,905,729
U.S. government | Significant Other Observable Inputs (Level 2) | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	30,400	33,788
U.S. government | Total | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	30,400	33,788
U.S. Agency | Significant Other Observable Inputs (Level 2) | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	13,644	6,747
U.S. Agency | Total | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	13,644	6,747
Non-U.S. govt. & agency | Significant Other Observable Inputs (Level 2) | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	1,840	10,665
Non-U.S. govt. & agency | Total | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	1,840	10,665
Agency MBS | Significant Other Observable Inputs (Level 2) | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	239,180	264,468
Agency MBS | Total | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	239,180	264,468
ABS/CMBS | Significant Other Observable Inputs (Level 2) | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	88,299	135,304
ABS/CMBS | Total | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	88,299	135,304
Corporate. | Significant Other Observable Inputs (Level 2) | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	601,960	562,690
Corporate. | Total | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	601,960	562,690
Municipal | Significant Other Observable Inputs (Level 2) | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	562,042	481,425
Municipal | Total | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	562,042	481,425
Equity securities | Quoted Prices in Active Markets for Identical Assets (Level 1) | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	391,152	410,642
Equity securities | Total | Fair value measured on recurring basis
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	$ 391,152	$ 410,642

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014	Dec. 31, 2014
INTANGIBLE ASSETS
Goodwill and intangibles	$ 72,249		$ 72,249		$ 72,695
Basic EPS, Income (Numerator)
Income available to common shareholders	37,185	$ 35,725	67,783	$ 64,694
Diluted EPS, Income (Numerator)
Income available to common shareholders	$ 37,185	$ 35,725	$ 67,783	$ 64,694
Basic EPS, Weighted Average Shares (Denominator)
Number of shares outstanding	43,210	43,001	43,176	42,993
Effect of Dilutive Securities, Shares (Denominator)
Stock options (in shares)	809	687	832	676
Diluted EPS, Weighted Average Shares (Denominator)
Number of shares outstanding	44,019	43,688	44,008	43,669
Basic EPS, Per Share Amount
Basic net earnings per share (in dollars per share)	$ 0.86	$ 0.83	$ 1.57	$ 1.50
Diluted EPS, Per Share Amount
Diluted earnings per share (in dollars per share)	$ 0.84	$ 0.82	$ 1.54	$ 1.48
CBIC and Rockbridge
INTANGIBLE ASSETS
Amortization of intangible assets	$ 200		$ 400
Surety segment | Acquisitions prior to 2011
INTANGIBLE ASSETS
Goodwill and intangibles	26,200		26,200
Goodwill	25,600		25,600
Indefinite-Lived Intangible Assets (Excluding Goodwill)	600		600
Surety segment | Contractors Bonding and Insurance Company
INTANGIBLE ASSETS
Goodwill	15,100		15,100
Casualty and Surety segment | Contractors Bonding and Insurance Company
INTANGIBLE ASSETS
Goodwill and intangibles	30,300		30,300
Indefinite-Lived Intangible Assets (Excluding Goodwill)	7,500		7,500
Definite-lived intangible assets, net of amortization	2,400		2,400
Casualty segment | Contractors Bonding and Insurance Company
INTANGIBLE ASSETS
Goodwill	5,300		5,300
Casualty segment | Rockbridge
INTANGIBLE ASSETS
Goodwill and intangibles	15,700		15,700
Goodwill	12,400		12,400
Definite-lived intangible assets, net of amortization	$ 3,300		$ 3,300